50/30/20 Budget: How to Make a Realistic Money Plan

If you’ve tried budgeting again and again and it just doesn’t seem to be working for you — it’s not your fault. Most budgets are overly complicated and almost impossible to keep track of.

I’m going to teach you the 50/30/20 budget — aka the only budgeting formula you will ever need. After this, you’ll have all the information you need to put together a simple budget you can stick to.

Why the 50/30/20 Budget Works

Imagine two women made a New Year’s resolution to eat healthier, but both get invited to a party with an all-you-can-eat buffet. One of the women makes a plan; she’s going to fill up her plate with slow-release carbs and clean protein, allow herself one dessert, and stay away from all the fried foods. The other woman just decides to wing it. Who do you think will be more successful? The woman who had a plan, right?

That’s why budgeting works; it helps you plan for the best use of your money so that you’re making decisions about how to use your money when you’re in the right frame of mind — instead of when you’re in the checkout line.

But budgets often fail because people overcomplicate them. People try to create too many categories and can’t figure out what amount to set in the different categories.

The 50/30/20 budget (also called the Balanced Money Model) is an intuitive, easy-to-implement formula that only requires three categories. This approach doesn’t require complex calculations and number-crunching. In fact, there are free online 50/30/20 calculators that will figure out the percentages for you.

That’s why the Balanced Money Formula works. If you’re ready to make your next budget, your last budget, keep reading.  

What is the 50/30/20 Budget?

The 50/30/20 budgeting plan divides your after-tax income into three buckets:

1. 50% to needs: the things you cannot live without
2. 30% to wants: the things that make life more enjoyable
3. 20% to savings: putting money away for your future

When you first take a look at your finances you may find that you are nowhere near these percentages. That’s okay! All we can ever do is start where we are and work toward our new goal. Getting clarity on your current spending patterns is the first step.

All right, let’s dig into each of these categories:

Needs: 50% of Your Income

Your needs are the “must-haves” — things you cannot live without or bills you have to pay regularly. These are what you need to have in order to stay alive (food, water), stay healthy (medication), stay in a job (transportation, internet), and to stay in a home (rent, utilities, etc.).

If your needs cost more than 50% of your income, it becomes really difficult to sustainably save money. You may need to either re-evaluate your cost of living or look for ways to increase your income so that you can support your current living situation.

If you’re spending more than 50% on necessities, narrow in on where your biggest expenses are and figure out ways to reduce them. The less your needs cost, the more money you have to put towards savings or to spend on your wants.

A few years ago, my family made a big move from living in San Francisco, where the cost of living was really high, to relocating to another state where the cost of living worked much better for our budget.

Now, obviously relocating isn’t the right option for everyone, but don’t be scared to think outside the box to find ways to save. Can you trade your car for something more affordable, get a better rate on your insurance? Make more meals at home?

Wants: 30% of Your Income

Your “wants” are your fun money for right now. This includes things like movie tickets, going to restaurants, or a new outfit.

Spending money on wants is important. The purpose of life isn’t to save every penny — it’s to enjoy life. We just need to do it sustainably. We need to make sure that enjoying our life today doesn’t limit our ability to enjoy life in the future because we’ve accidentally overspent and created debt or financial insecurity!

If your wants are taking up more than 30% of your income, try to find cheaper alternatives to things you enjoy buying or doing. For example, instead of going out with the girls, maybe offer to host a game night at home. Or instead of buying a new summer wardrobe, check out a thrift shop or consignment store.

Savings: 20% of Your Income

This is money that is strategically put aside so that you can build a better future for yourself or your family.

It’s easy to forget to think long-term when putting together a budget. The goal isn’t just to survive the month; it’s also to make life easier for future you by building wealth and long-term financial security.

How exactly you use this portion of your budget is up to you. If you don’t have an emergency fund, you’ll want to save enough money to cover 3-6 months of expenses. Otherwise, you may want to put this money away for retirement.

Some special instructions for anyone carrying credit card debt: if you currently have high-interest rate debt, you’ll want to put this money towards paying off your debt rather than building up your savings.

Since the interest rate on credit cards is so high, it doesn’t make financial sense to have money sitting in savings while also paying high interest on credit card debt. We recommend building up a small emergency fund — typically, $1,000 is enough — and then use the savings portion of your budget to pay down your debt.

So, if this part of your budget is below 20%, look to reduce your spending on needs and wants. If it’s already over 20%, awesome job! Keep it up!

How to Use the 50/30/20 Budget

The 50/30/20 budget is an easy way to start budgeting. To get started, take your income and multiply it by these percentages so you know what your target is for each category. Then, start keeping track of everything you spend money on and what category it falls into. Each week, add up the amounts, see how it compares to your target amount, and use that to guide your spending decisions.

Wealth is built by the small actions and decisions you make every day. The 50/30/20 budget is a great way to meet your financial goals easily and quickly so that you can stress less and spend more time and money on the things that are most important to you.