This budget hack can help you save more effectively

Having a household budget can help you stay on top of bills, pay off debt, save for retirement, and achieve other long- and short-term financial goals. But there are many ways to go about it.

One popular budgeting option is to follow the 50/30/20 rule, which requires you to allot a designated portion of your earnings to savings, wants, and needs. This method is also called “the balanced money formula,” as it can help you strike a healthy balance between saving and spending.

What is the 50/30/20 rule?

The 50/30/20 rule is a simplified budgeting method designed to help you better manage your spending while also stowing away funds for the future.

The rule originated in a book titled All Your Worth: The Ultimate Lifetime Money Plan, written by Sen. Elizabeth Warren and her daughter, Amelia Warren Tyagi. It was published in January 2006 by Simon & Schuster and was a New York Times bestseller. 

According to the 50/30/20 rule, you should spend: 

• 50% of your after-tax income on must-haves 
• 30% on wants
• 20% on savings and paying down debt

In the book, Warren and Tyagi call the strategy a “simple, direct, effective” strategy that will help you strike a financial balance, build wealth for the future, and ensure that “there is always enough for each of the three categories.”  

It can also be a good strategy for beginning budgeters, according to Jordan Hanson, a certified financial planner with HCR Wealth, a financial-planning and wealth management firm in Los Angeles.

“Anyone who is just getting into budgeting and is looking for simple, high-level rules or guidelines can benefit from using the 50/30/20 rule,” Hanson says. “This rule is best utilized when a budgeter is less focused on the specific line items in their budget and more focused on the big picture.”

How to create a budget using the 50/30/20 rule 

Creating a budget based on the 50/30/20 rule isn’t a one-and-done process. You’ll look at your income, assess your current spending habits, set goals, and then readjust your budget regularly. Here’s how to get started.

1. Calculate your after-tax income

The first step to creating a 50/30/20 budget is to determine your after-tax income—how much money you bring home after covering taxes. If you work a traditional job in which your employer issues paychecks and regularly deducts taxes and Social Security, Hanson says, “You can look at your most recent paychecks and calculate a monthly figure.”

If your employer deducts health, life, or disability insurance premiums, be sure and add those back in. You’ll account for these costs later on in your “must-haves” category. 

If you’re a contractor, freelancer, another type of nontraditional worker, or are self-employed, you may have to check your bank account instead. Tally up all the deposits for the month—from jobs, gigs, clients, et cetera, and then deduct the amount you need to set aside for taxes. You can look to last year’s tax returns for a good pulse on this.

You should also be sure to include any supplemental income you might get, like child support, tips, commissions, and spousal support. In the event these cause your income to fluctuate, you can add up a few months of earnings to determine a rough average. 

2. Assess recent spending

Next, it’s time to get a handle on your household expenditures—and evaluate how those fit into the 50/30/20 method.

“Review your expenses from the prior month,” Hanson says. “Then categorize each expense into one of those three categories—needs, wants and savings and debt.”

It sounds easy, but you may have hundreds of expenses to pore through—and some may not be clearly situated in any category. If you need help, here’s what should go under each section, according to “All Your Worth”:

Must-haves

• Housing
• Utilities
• Basic food needs
• Phone and internet service
• Medical care
• Insurance
• Transportation 
• Child care
• Property taxes
• Legal obligations, like child support or alimony
• Contractual obligations/payment plans (gym memberships, appliance payments, etc.)
• Minimum loan payments (student loans, car loans, etc.)

Savings/debts

• Monthly contributions to retirement accounts
• Other savings or college account contributions
• Extra debt payments (beyond the required minimum payments)

Wants

• Eating out
• Gifts
• Entertainment
• Streaming services
• Country club dues
• Massages and beauty treatments
• Extracurriculars and lessons
• Other non-essentials

Once you’ve added up the last month’s expenses, you can determine how much of your income is going into each category—and, most importantly, whether your current spending complies with the 50/30/20 rule or if you need to make adjustments. There are also calculators, like this one from Intuit, that can help with this step.

3. Make a plan

If your current spending habits and expenses don’t quite align with the 50/30/20 rule, you’ll need to make some changes. This might include reducing your spending on “wants” or finding places to cut back on “must-have” costs, possibly by changing your insurance plan or refinancing your mortgage.

Here’s an example: 

• After-tax income: $5,000
• Must-haves: $2,500 (50%)
• Wants: $1,500 (30%)
• Savings: $500 (10%)

In the above scenario, you’re right on target with your must-have spending, but the others are out of balance. You could look at your expenditures in the “wants” category over the last few months to determine some potential areas to cut back on. 

To ensure you’re not spending more than you should in each category, you can also try separating your funds into different bank accounts—one for each category, according to Faron Daugs, a certified financial planner, wealth advisor, and founder of Harrison Wallace Financial Group.

“This helps to avoid the risk of using funds for ‘wants’ before the actual household ‘needs’ are met—which can happen if the budget funds are commingled,” Daugs says.

For your saving, investment, and debt-payoff goals, Daugs also recommends separate accounts—ideally with direct deposits. This automates your contributions and helps you avoid using those funds for “wants” as well. 

4. Reassess regularly

At the start of your budgeting journey, go through and categorize your expenses every month to ensure you’re still in line with your 50/30/20 goals. “As you become more familiar and comfortable with your budget, you can check on it and reevaluate it less frequently, maybe quarterly or semiannually,” Hanson says.

Budgeting apps like Mint and YNAB can help you check in on your progress, even tracking and categorizing your expenditures for you. The Consumer Financial Protection Bureau (CFPB) also has free, fillable worksheets you can use. 

Once you get comfortable with your budget, Hanson says, only annual check-ins should be necessary. 

“The goal is for you to be able to automate your finances to the point where it doesn’t require you to check in on your budget any more frequently than annually,” Hanson adds. “At this point, you would also only reevaluate your budget when a major event happened in your life that resulted in a significant change to your income or expenses.”

The takeaway

The 50/30/20 system can be good for beginners and big-picture budgets, according to experts. But if you’re looking for other options, there are many budgeting strategies to explore, including the envelope system, the pay-yourself-first budgeting method, and the 80/20 budget. Consider consulting a financial professional or credit counselor if you need help choosing the right budgeting strategy or you.

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