The 50-20-30 rule is a way of organizing the categories of your spending into three percentages.
If you are a beginner at budgeting, don't let this overwhelm you! A 50-20-30 budget rule is a great tool! Please know that this is a gentle starting point. When you are figuring out your budget, make sure to use your after-tax income. If you don’t have a steady paycheck, and you have been working freelance for at least three months, just add up how much you have made and divide by the number of months for an average. An average number is better than no number.
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50% – Fixed Expenses – essentials – costs you cannot live without
-groceries (but not dining out)
-student loans ***
-health insurance (out of pocket)
-insurance (car, life, home, etc.)
30% – Flexible Expenses – lifestyle expenses – variable expenses
-cell phone bill
-Netflix, Amazon Prime
20% – Savings and debt reduction
-an emergency fund
-payment toward debt
You may have different priorities – for example, if you want to mix up the rates of the fixed and flexible expenses, go for it, in moderation – but please don’t have less than 20% saved each month of your take-home pay!! It’s a good habit to have.
Let’s get into this a little more clearly. Fixed vs. Flexible expenses can also be looked at as “needs” versus “wants.” For example, let’s look at my phone bill. I do not have a landline; I only use my cell phone. I could easily cheat myself out of an honest budget by putting that expense in a “need” category. I have children to communicate with, work to contact, etc. But let’s get real. Do I need the cell phone plan with unlimited texting and more data than I use every month? NOOOOO. Do I NEED an iPhone 7 Plus? NOOOOO. Do I want those things? Yes. For now. That is why I put the cell phone bill in the flexible spending category. Yes, a phone in 2017, especially with kids is a necessity. But MY particular choice of phone, that’s just a choice. I also add my internet service, Amazon Prime membership, and my Netflix monthly bill into my flexible expenses category.
*** student loans – some may count this in the debt category.
New to Budgeting?
If you have never budgeted before at all – or if you have never looked at your spending in this way, it is fascinating and beneficial to get a wide-angle view of your priorities. If you are one of those people that thinks _”no matter what”_ you CAN’T keep a budget? Try this – It’s different than other more detailed budgeting tools.
Saving for a Large Future Expense
So let’s say you want to save for a down payment on a house. Add how much you want to save into your savings category. Do you have enough money to pay your fixed expenses? Figure out your percentages after raising your savings above 20% (so you still can save an emergency fund, and retirement, etc…) Find ways to cut your fixed expenses. Call your phone company, cable company, garbage company – call the insurance companies! See if they will lower your rates.
The 50-30-20 rule and good riddance to guilt!
The 50-30-20 rule is a “guideline” more than a “rule.” If you start by writing in the numbers for all your fixed expenses, then entering in any debt or savings next, the rest of the money should be about 30% for flexible expenses. If it isn’t enough, where can you cut from other categories? Think of the 30% as guilt-free spending money. As long as you have at least 20% put into savings, and you are paying all your bills, the rest is for you to have guilt-free. If you find that you have extra money left at the end of the month (yay you!), next month I would advise you to add that into your savings category (especially if you still need an emergency fund, which can be anywhere from $1000 to a year of living expenses.)
It’s easier to save money than it is to make more money!
Let me repeat that. It’s easier to SAVE money than it is to MAKE MORE money. It’s a fact. (Jack.)
Don’t Give Up Because of Imperfection
Nobody is perfect. Please. I cannot tell you how many years of my life I had no budget because as soon as I spent $40 more in one category than I was “supposed” to, I said I couldn’t do it. And then all hell broke loose! Spending more in one category, whether it is a percentage like this budget example, or a detailed class budget – being able to go with the flow, and move stuff around is what budgeting is all about. If I spent $40 more on the vet visit with the dog than I had planned, I could take $40 out of my money for dining out. It’s simple; you just have to be willing to make the changes as they come. NOBODY is perfect. (nobody.)
Free 50-30-20 Budget Spreadsheet Download
I have created a simple yet effective excel spreadsheet that I use when I want to see how my “percentages” are faring, even if I am keeping “within” by budget every month. I find that very often I am spending less on variable expenses and more on fixed costs – and I don’t mind that at all, as long as the 20% is going into savings.
You can download my Free 50-30-20 Budget Spreadsheet here.
Instructions for using the spreadsheet
- Start here: You should rewrite my numbers as we go along. I do not suggest clearing all of my numbers out; you don't want to clean out a formula by mistake. Start below by entering your monthly take-home pay.
- Once you enter this amount, your “aim for” numbers will automatically be filled in.
- Begin entering your categories on the left-hand side. If you have expenses that are not listed here, you can add them to an entry that IS listed that you do not need. Otherwise, you can insert cells where you need them. Notice that your TOTALS change as you enter your numbers. Don't forget to put a 0 or leave blank any categories that you are not using – in other words, don't keep my numbers in there unless they are the same as yours.
- Play around with your numbers and see where you are and where you need to be. You can look at the top right numbers to easily see all three categories quickly and easily.
Need some help? Please contact us! We love suggestions too…
Check out our budgeting post of the cash envelope system of organizing your money here.