The 50/30/20 method is a popular way to create a budget. When creating the budget, you split your income into 3 different categories; Needs, Wants and Savings.
We have created the calculator below to automatically split your income into the 3 different categories making it easier to start working out your monthly budget.
How To Use The 50/30/20 Budget Calculator
- Work out your post-tax income. If you are employed this will be the amount you receive into your bank on a monthly basis. If you’re paid weekly, work out your average monthly income.
- Input your post-tax income into the “Net Monthly Income” box below
- Add any extra income in the extra income box. This could include any side hustles or government benefits.
- The categories will automatically update when you input your income. You can now use these numbers to start creating your budget.
What Is The 50/30/20 Budgeting Method?
The 50/30/20 budgeting system is a straightforward method for managing personal finances, popularized by Senator Elizabeth Warren and Amelia Warren Tyagi in their book “All Your Worth: The Ultimate Lifetime Money Plan”. The guideline suggests dividing after-tax income into three main categories:
- Needs (50%): Allocate 50% of your after-tax income to necessities. This includes basic living expenses like housing (mortgage or rent), utilities, food, transportation, and health insurance.
- Wants (30%): Dedicate 30% of your income to discretionary expenses or things you want but don’t necessarily need to survive. This can include dining out, entertainment, shopping for clothes, vacations, and other non-essential expenses.
- Savings and Debt Repayment (20%): The remaining 20% should go towards savings, investments, and debt repayments beyond the minimum required payments. This can include contributions to retirement accounts, building an emergency fund, or paying down high-interest debt.
This system is a guideline, so individuals can adjust the percentages based on their unique situations. The primary advantage of the 50/30/20 rule is its simplicity, which can make it easier for people to start and stick to a budget.
Why Should You Use The 50/30/20 Method?
The 50/30/20 budgeting method offers several advantages that make it a useful tool for personal finance management:
- Simplicity: One of the main reasons many people avoid budgeting is because it can seem complicated and time-consuming. The 50/30/20 rule simplifies budgeting into three clear categories, making it easier to understand and implement.
- Flexibility: While the rule provides a basic framework, it allows for personal adjustments based on unique financial situations and priorities. For instance, someone with minimal debt might allocate more to savings or wants, while another might prioritize paying off debts.
- Holistic Financial Picture: The method encourages individuals to consider all aspects of their financial lives—from essential expenses and discretionary spending to savings and debt repayment. This ensures a balanced approach to money management.
- Encourages Savings and Debt Repayment: By dedicating 20% of income to savings and debt reduction, individuals are prompted to prioritize financial security and growth. This can help create a cushion for emergencies, secure future financial stability, and reduce the strain of debt.
- Promotes Conscious Spending: By setting aside 30% for wants, it becomes easier to distinguish between needs and desires. This can lead to more intentional spending choices and reduce impulsive or unnecessary purchases.
- Adaptable to Income Changes: Whether someone gets a raise, loses a job, or faces unexpected expenses, the percentages can be adjusted to accommodate these changes. This means the method remains relevant and applicable across various life stages and situations.
- Financial Awareness: By categorizing expenses, individuals can identify areas where they might be overspending and areas where they might need to allocate more resources. It offers a clear snapshot of where money is going, making it easier to make informed decisions.
- Establishes Clear Financial Goals: Knowing that a portion of income should go towards savings or debt repayment provides a clear target to aim for, helping to foster a mindset of financial discipline and responsibility.
In essence, the 50/30/20 method serves as a foundation for sound financial habits. While it may not fit everyone’s circumstances perfectly, its principles can be adapted and serve as a starting point for those new to budgeting or those looking for a more structured approach to managing their finances.
Want A More Detailed Overview Of Your Monthly Spending?
If you want to get a more detailed view of your monthly spending, I would recommend checking out our Monthly Budgeting Google Sheet.
- Monthly Budget Overview
- Custom Categories
- Transaction Log
- View Daily Spending Overview
- Track Needs, Wants, Savings/Investments & Debts