Budgeting doesn’t need to be complicated, nor should it take hours out of your day. In fact, the best ways to budget are often the simplest. Take, for example, the 50/30/20 rule. The 50/30/20 rule is a straightforward monthly budgeting method that tells you exactly how much to put towards your savings and your living costs each month.
With a clear big-picture overview of your budget for the month, you can confidently avoid overspending and build up your savings over time—all without painstakingly recording every single transaction.
So, if you’ve ever downloaded a budgeting app only to abandon it by the third day, you might want to give the 50/30/20 method a try. It’s one of the best budgeting tips we’ve found, and here’s how it works.
The 50/30/20 rule is an easy budgeting method that can help you to manage your money effectively, simply and sustainably. The basic rule of thumb is to divide your monthly after-tax income into three spending categories: 50% for needs, 30% for wants and 20% for savings or paying off debt.
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By regularly keeping your expenses balanced across these main spending areas, you can put your money to work more efficiently. And with only three major categories to track, you can save yourself the time and stress of digging into the details every time you spend.
However, the 50/30/20 rule should only be used as a rule of thumb for budget planning. The exact percentages for each category depend on your personal financial situation, local cost of living, inflation, and many other factors.
One question we hear a lot when it comes to budgeting is, “Why can’t I save more?” The 50/30/20 rule is a great way to solve that age-old riddle and build more structure into your spending habits. It can make it easier to reach your financial goals, whether you’re saving up for a rainy day or working to pay off debt.
The 50/30/20 rule originates from the 2005 book, “All Your Worth: The Ultimate Lifetime Money Plan,” written by current US Senator Elizabeth Warren and her daughter, Amelia Warren Tyagi.
Referencing over 20 years of research, Warren and Tyagi conclude that you don’t need a complicated budget to get your finances in check. All you need to do is balance your money across your needs, wants and savings goals by using the 50/30/20 rule.
Savings Tips | The 50-30-20 RuleThe 50/30/20 rule simplifies budgeting by dividing your after-tax income into just three spending categories: needs, wants and savings or debts.
Knowing exactly how much to spend on each category will make it easier to stick to your budget, and help keep your spending in check. Here’s what a budget that adheres to the 50/30/20 rule looks like:
Simply put, needs are expenses that you can’t avoid—payments for all the essentials that would be difficult to live without. 50% of your after-tax income should cover your most necessary costs.
Needs may include:
For example, if your monthly after-tax income is €2000, €1000 should be allocated to your needs.
This budget may differ from one person to another. If you find that your needs add up to much more than 50% of your take-home income, you may be able to make some changes to bring those expenses down a bit. This could be as simple as swapping to a different energy provider, or finding some new ways to save money while grocery shopping. It could also mean deeper life changes, such as looking for a less-expensive living situation.
With 50% of your after-tax income taking care of your most basic needs, 30% of your after-tax income can be used to cover your wants. Wants are defined as non-essential expenses—things that you choose to spend your money on, although you could live without them if you had to.
These may include:
Using the same example as above, if your monthly after-tax income is €2000, you can spend €600 for your wants. And if you discover that you’re spending too much on your wants, it’s worth thinking about which of those you could cut back on.
As a side note, following the 50/30/20 rule doesn’t mean not being able to enjoy your life. It simply means being more conscious about your money by finding areas in your budget where you’re needlessly overspending. If you’re confused about whether something is a need or a want, simply ask yourself, “Could I live without this?” If the answer is yes, that’s probably a want.
With 50% of your monthly income going towards your needs and 30% allocated to your wants, the remaining 20% can be put towards achieving your savings goals, or paying back any outstanding debts. Although minimum repayments are considered needs, any extra repayments reduce your existing debt and future interest, so they are classified as savings.
Consistently putting aside 20% of your pay each month can help you build a better, more durable savings plan. This is true whether your ultimate goal is building an emergency fund, developing a long-term personal financial plan, or even preparing for a down payment on a house.
And it’s impressive how quickly the savings can add up. If you bring home €2000 after tax each month, you could put €400 towards your savings goals. In just a year, you’ll have saved close to €5000!
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So, how do you actually use the 50/30/20 rule? To put this simple budgeting rule into action, you’ll have to calculate the 50/30/20 ratio based on your income and categorize your spending. Here’s how:
The first step to using the 50/30/20 budgeting rule is to calculate your after-tax income. If you’re a freelancer, your after-tax income will be what you earn in a month, minus your business expenses and the amount you’ve set aside for taxes.
If you’re an employee with a steady paycheck, this will be easier. Take a look at your payslip to see how much lands in your bank account each month. If your paycheck automatically deducts payments such as health insurance or pension funds, add them back in.
To get a true picture of where your money goes each month, you’ll need to see how and where you’ve spent your income over the past month. Grab a copy of your bank statement for the past 30 days, or simply use the Insights feature in your N26 app. It automatically sorts all your transactions into categories such as Salary, Food & Groceries, Leisure & Entertainment, and more.
Now, split all your expenses into the three categories: needs, wants and savings. Remember, a need is an essential expense that you can’t live without, such as rent. A want is an additional luxury that you could live without, such as dining out. And savings are additional debt repayments, retirement contributions to your pension fund, or money that you’re saving for a rainy day.
Now that you can see how much of your money goes towards your needs, wants and savings each month, you can start to adjust your budget to match the 50/30/20 rule. The best way to do this is to assess how much you spend on your wants every month.
According to the 50/30/20 rule, a want is not extravagant—it’s a basic nicety that allows you to enjoy life. As cutting back on your needs can be a complex and challenging task, it’s best to work out which of your wants you can cut back on to stay within 30% of your take-home income. The more you reduce spending on your wants, the more likely it is that you’ll be able to hit your 20% savings target.
While our 50/30/20 rule calculator can provide a general overview of your ideal 50/30/20 rule budget, a 50/30/20 rule spreadsheet is a good option if you’d like to create a more in-depth budget.
Spreadsheet software such as Microsoft Excel, Google Sheets and Apple Numbers all offer premade templates to help make spreadsheet budgeting easy. You can find plenty of free online 50/30/20 rule spreadsheets that are compatible with whichever program you’re using.
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Budgeting methods can help you feel more reassured and in control of your financial picture. But it also helps to have financial tools that can help you along the way. At N26, we want to help you reach your budgeting goals without breaking a sweat. Access your money from anywhere with your 100% mobile savings account, and get instant push notifications for an up-to-date picture of your finances.
What’s more, your free Spaces sub-accounts can help you track multiple savings goals, while N26 Insights will automatically categorize your spending for you to help you keep on track.
Today I'm sharing a secret that has changed my life and will definitely change yours as it helps you determine WHERE your money should go. Come learn all about the 70% budget rule!
When I work with families or individuals, an overwhelming issue Freebs want help with is figuring out, based on their income, how much money to spend versus save. They want to know how to be able to afford vacations and FUN while still paying bills and being financially responsible.
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Well, the time has come to give you my secret sauce.
I'm going to share one of my simplest (but most effective) secrets with you. I'm a bit nervous about it, for I feel once I do, no one will need me any more (waah!). But I love you, so I'm going to share it anyway… 😉
The 70% budget rule is a financial principle that not only works, but it will work FOREVER. With a little adjusting, this will help you throughout your life to know exactly how much to spend, save, and invest… No matter your income, debt, where you live, or stage of life.
When Bubba and I finally saved up enough and had a stable enough income to move into our home, we were on cloud nine… until Bubba had to take a 40% pay cut a few months after closing. Womp womp. The good news is that the 70% budget rule helped us stay on track. No derailing, no panicking, no living off of credit cards. We knew exactly what to do. Though we had to work hard, it didn't ruin us like our F.D. (Financial Disaster) nearly did.
Knowing how much to spend and save makes all the difference!
Doesn't that sound dreamy? Well, as dreamy as any kind of budgeting system can be, anyway… Let's get to it. I now introduce to you…
Duhn duhn duuuuuuhn! It's simple, really. Here's how the 70% budget rule works. You take your monthly take-home income and divide it by 70%, 20%, and 10%. You divvy up the percentages as so:
Piece of cake. Piece of crumb cake. (Name that movie!)
I'll go into further detail below, but here is a YouTube video that also goes into more of our personal background and how I came to develop this method!
The beauty of percentages versus hard-nosed numbers is that budget percentages fluctuate easily; your budgets will always grow or decrease with you! You'll never be lost or confused. If you make $1,000, $10,000, or $1,000,000… you can always easily find 70% (with help of a calculator, if you refuse to do mental math like I do).
Another beauty with this method is that everything is covered! You have money set aside for savings or debt… for spending… for investing, retirement, or charity… you're covered! So there's no need to stress, worrying about how you'll ever get your dang credit card paid off. There's no need to feel guilty when you go on a vacation. Gotcha covered, chap.
With every tip I share, you MUST remember to make this work for you! I've had lots of comments and questions about wanting to tithe 10% AND put money toward retirement. If you can afford it, YAY! GO FOR IT!
This is just a general guideline.
For us, until a few years ago, we wouldn't possibly have been able to live off of less than 70% because we made so little. I understand that so many of you are in that same situation and it's a huge trial. I've been there.
As we got out of debt and my husband got better paychecks, we were able to move into more of an abundance mode… So we take from the 70% and use some of that to go toward investing, retirement, and college for our kids, all while preserving the 20% savings and 10% tithing.
Just do what works for you and your family!
We're finally getting to the meat and potatoes! Trust me, you don't wanna miss out on this part…
When I say “income,” that doesn't mean the income listed on your tax statements. “Monthly take-home income” literally means IN-come… The amount of dollars that actually hit your bank account each month.
Yes, that means after taxes, insurance, withholdings, etc. From here on out if its not deposited into your checking account, it's not considered “monthly take-home income” in Jordan-dom. Kapish?
Expenses include EVERYTHING you spend money on, including (but not limited to): bills, utilities, emergency or unexpected expenses, shopping (this includes Amazon), groceries, take out, you name it. If you spend money on it, it's considered an expense.
70% or less is the real key. If you don't NEED to live off of 70%, then by all means, don't! The less you spend, the more you can save and invest = the better life your family will have. 70% is the maximum!
Pull up every dime you've spent for the last 3 months (you read that right) and put it on a spreadsheet. EVERY DIME…even if it's $.50. Every dime or this won't work!
A spreadsheet is the best way to do this so you know at a glance what you're spending money on (groceries, eating out, clothing, decor, bills, school fees, etc). It's best if you can see it!
Don't have a credit card or bank statements because you pay cash for everything? That means you don't have accurate record of all spending, so you'll need to start tracking EVERY DIME you spend for the next 3 months. Electronic is really the easiest, though. Don't like credit cards? Use a debit card, it's basically like cash!
You want to make sure you're tracking everything and know what categories you're spending the most on! I really, really, really recommend using a debit card. Once you have a handle on it, you can go back to cash!
Find the total of all spending (for all 3 months) and divide by 3, so you find a realistic average. Now that you have your average, you can make some real decisions about how to move forward. If you are under 70%, you are GOLD! And if you're not…
Are you over your 70% guideline? It's okay. Take a deep breath and prepare yourself to start cutting back on expenses. Now, make a duplicate copy of your spreadsheet so you don't mess up the original. Start deleting unnecessary, “want” (not “need”) expenses that you could cut out monthly. This could include things like eating out, shopping, subscriptions, etc. Keep deleting until you're within 70%.
What if no matter what you do, you can't get it to fit within 70%? Get real with yourself and make it happen. Sell your car. Move to a cheaper house. Cut your cable. Get a better paying job or make more money at work. Start a side hustle.
Sorry to break it to you guys, but if you're spending too much, you're spending too much! I'm tough love here because Bubba and I did sell our car. We did cut cable. We stopped eating out entirely. I stopped getting my hair cut professionally. We did it!
We focused first on cutting back to get our debt and spending in order and build up savings. Over time our focus has shifted to making more money (thanks to Bubba working his tail off); so after paying off debt and working hard, we now have started sneaking those luxuries back into our life. It's like losing weight. You might need to live off of lettuce and water to drop 100 pounds, but eventually, you can start eating cookies again… in moderation, of course.
My simple envelope budget method is a super easy way to keep your budget in check each month!
Dave Ramsey won't like this, but I don't necessarily believe that everyone should make paying off their house an absolute priority. Why? Because for Bubba and I, it wasn't even close to an option for the first 8 years of our marriage.
I do think you can be very smart about it. Pay extra toward principle, refinance to get a better interest rate, buy a home that allows you to keep all spending to 70% or less of your income. But do we need to sink every dime we have into paying off a house? Not in my book.
When I say “pressing debt” I mean the urgent, expensive debt that is hurting your credit and costing you LOADS of interest each month: namely credit cards and loans.
You need to be your own judge and decide if a car loan is considered pressing debt in your house. Cars are weird for us because they are a business expense, so I'm not going to answer that one for you. Just make sure that any car payments fit easily in your 70% range if you get or have a car loan.
Keeping with our $3,000 example, 20% would be $600/month. Yes, 20% might seem high…but yes, savings is that important! I suggest 20% (at least). If you can spare more, then do more! ESPECIALLY if you are paying off debt… Put as much as you can spare toward your debt so you can be free and move on to bigger and better things.
If your current financial situation can't support setting a solid 20% aside each month, that's okay! Do your best to get on your feet financially, put away as much as you can, then increase the percentage as you can spare it as time goes on.
I recommend having 10% go into Family Savings and 10% going to Emergency Savings. I explain the difference between the two in my 7 Bank Accounts Your Family Should Have post.
Have it automatically draft into those bank accounts each month so you never have to think about it! Not sure how to do that? Call your bank, and they can set it up in a snap.
If any fees are involved with auto drafting, get a better bank! We bank at Chase, but there are lots of great ones out there.
DON'T SKIMP ON THIS NO MATTER HOW TEMPTING IT IS! The beauty of having half go to Family Savings is that savings account is where the “fun” stuff you never seem to have money for (Disneyland…a boat…new couches…a car…) comes from. The beauty of having half go to Emergency Savings is that it will protect your family when the inevitable hits!
We will all need our savings at one point or another. 10% is nothing to protect your precious family!
Since the day I turned 8 years old, 10% of anything I earned has gone to my church. Not because my church is destitute or money-hungry, but because I firmly believe (and have seen it again and again and again in my own life) that karma is REAL. God is GENEROUS, and 10% is little compared to what He gives. Not to mention you get back 10 times what you give in life, and I'm living proof of that. BUT… I understand not everyone feels the same way.
Here's what to do with that 10% (which, as per our example, would be $300/month):
Remember, as mentioned above, you don't have to limit yourself to 10%! Just be sure to set aside AT LEAST 10%, no matter your income. For us, we wouldn't have been able to afford more than 10% for years, but now we can.
I promise this works. This principle is SIMPLE and LIFE-CHANGING for 3 simple reasons:
So now you know all about the budget percentages and how to make them work on any budget, what are you waiting on? Keep up with us on social media to get even more great budgeting tips! I share a lot on my personal Instagram account, Fun Cheap or Free Instagram, Facebook, and Pinterest!
If you're new here, welcome! You can get all my budgeting and finance tips, and my secret sauce in my fun-to-watch video program Budget Boot Camp!
You have nothing to lose because if you don't save or earn at LEAST what you paid for it, I'll give your money back. So use the code FCFBLOG at checkout to get an extra 10% off, and give it a try!
Make sure you check out these other posts!
XOXO,