It’s a popular budgeting tool for beginners because it’s so simple and easy to understand. But there are some important things to consider when setting up a 50 / 30 / 20 budget. It’s a great first step for beginners but it’s not a perfect budgeting solution.
In this post, we’ll explore:
- What a 50 / 30 / 20 budget is
- Things to consider when setting a 50 / 30 / 20 budget
- How to create a 50 / 30 / 20 budget
- How to determine whether a 50 / 30 / 20 budget is right for you
What is a 50 / 30 / 20 budget?
A 50 / 30 / 20 budget is a simple budgeting technique. It states that 50% of your income should go towards your needs, 30% towards your wants and 20% to savings. It’s a percentage based budget but it's much simpler than budgeting category by category. It requires you to categories all your expenses as either a need or a want.
Things to consider when setting a 50 / 30 / 20 budget
Are the percentages set in stone?
I never recommend a percentage based budget with pre-defined percentages to my students. The same applies to a 50 / 30 / 20 budget. These percentages aren’t set in stone because they don’t always reflect your life.
Any budget that doesn't reflect your life and your goals isn't the right budget for you. Imagine picking up a gift from under the Christmas Tree. You’re so excited about your new present and you rip off the blush pink wrapping in a hurry. And then your smile fades.
It’s a...it’s a...wait, what is this? You sit there thinking “Santa got it all wrong, I didn’t want this…”. You opened the wrong gift. It’s not the perfect gift for you because it wasn’t for you. And then you hastily try to re-wrap it in the torn up wrapping paper and tell everyone the dog did it.
It’s super important that your budget reflects your life and what you want. Don't be afraid to change up the percentages as long as they still add up to 100%.
Think of it as more of a Needs / Wants / Goals budget instead of set percentages. How much of your income are you spending on needs and wants? How much can you dedicate towards your goals like saving and paying off debt?
Is 50% for needs too low?
Depending on your life and circumstances, 50% for needs could be too low. The actual percentages you use for a Needs / Wants / Goals budget should always be flexible. They should be able to change based on how you actually live your life.
Your life, personality and circumstances dictate how you spend money. Which means that they should also dictate how you budget your money. You might need more than 50% of your income to pay for your needs. Or maybe 50% is too much for you. Either way, it doesn’t matter - if your budget doesn’t match your life then your budget will fail.
What should you do with the 20% of your income that you save?
The first super important thing to note is that the “20% savings” rule no longer applies if you have debt. That’s why I prefer to think of this last piece of your budget pie as Goals. It’s money that you either save or put towards your financial goals and priorities like paying off debt.
Saving money while you still have debt doesn’t always increase your wealth. And unless you use those savings to make extra debt payments, you’re not becoming debt free. Those credit cards are going to take a looooong time to get paid off if you’re only paying the minimum payments.
Why? Because that’s what they’re designed to do.
Creditors make money from the interest you pay, they don’t lend you money because they’re nice people.
Once you pay off your debt, they stop earning money from you. So, they have very little incentive to help you pay off your debt. If you want to become debt free, you have to make extra payments in addition to your minimum payments. Your extra payments go towards paying off the money you borrowed - not interest payments.
The question you then need to ask yourself is whether budgeting 20% towards your goals will be enough? The more debt you have, the harder it’s going to be to pay it off. That means 20% of your income might not be enough.
Reaching your goals faster
Another thing to note is that the more you put towards your goals, the faster you’ll achieve them. If you’re itching to reach your goals, then spending 30% on lifestyle expenses might seem wasteful.
Don’t follow some outdated rule that you should be saving 20% of your income without questioning it. You need to look at your goals and figure out for yourself how much you need to dedicate towards your goals.
Although I'm sure you woke up looking gorgeous, you aren’t Sleeping Beauty. You aren’t enchanted to lift your finger and prick it. But if you follow a 20% savings rule, that’s exactly what you’re doing.
You’re not allowing yourself to make any progress on your goals. That's because you aren’t considering your goals in your budget. The two things cannot exist independently of each other.
What’s your net income and does this include retirement savings?
Net income is the money you receive in the bank after taxes and retirement contributions.
Taxes are never included in your income figure. You may have earned it but that money doesn’t belong to you. It belongs to Mr TaxMan and he doesn’t bring you any dreams. And believe me, I know it sucks but that’s the truth.
There’s always a lot of debate about whether your retirement savings count as part of your “20% savings”. And I'm here to tell you the long and complicated answer: NO.
Your retirement savings aren't included in your monthly budget. That goes for any budgeting method you use.
Your retirement savings (net of any fees and taxes) is 100% your money. But it’s held for you until you retire. You should keep your retirement fund in mind but not in your patent leather wallet. It forms part of your net worth but not your monthly cashflow.
You can’t touch it yet. It’s like having a triple tier birthday cake with raspberry filling and chocolate ganache frosting just for you. Your name is written on top of the cake in tiny pastel coloured macaroons.
But the party isn’t until tonight and you can’t touch the cake until everyone sings to you and someone hands you a knife.
Read more: 13 Important Things Missing From Your Budget
What are your needs vs your wants
A common argument that always pops up with a 50 / 30 / 20 budget is what determines whether an expense is a need or a want. I teach my students that a need is a basic necessity that’s essential for survival while a want is a lifestyle cost.
Sounds simple, right? Let’s complicate it a bit. Most categories in your budget have an element of both need and want in them. It's hard to separate them but ask yourself this: will you die if you don't spend money on this thing?
And I mean actual death, not “oh my god it’s so fluffy im gonna die!”. Chances are, if you have to ask yourself that, you already know the expense in question is a want.
Here’s what you can do to separate the needs from the wants. Think about what you’re spending your money on now and what you’d spend it on if you were broke.
For many expenses, there’s always going to be a free alternative. For example a gym membership might keep your mind and body healthy but you can always work out outside for free.
Needs = $2,500
Wants = $1,500
Goals = $1,000
But this is what Amy's spending really looks like.
Now, imagine Amy trying hard for the entire month to make this budget work. You can almost see her frustration. Month after month she spends more on her wants than her budget tells her to.
The best way
Let's take Amy’s net monthly income and assume that she’s read this blog post before creating her budget. She goes through the following steps to create the best budget for her life.
Step 1: Understand your spending habits
I always recommend starting from a place of awareness. What are your spending habits like? A budget that doesn't reflect your life and your habits will fail. To make a realistic budget you need to track your spending for at least one month. This helps determine where your money is going and what your spending habits are.
As you’re tracking your spending make sure you mark out which expenses are needs and which ones are wants. You’ll need to be strict with yourself here. “Really” wanting something isn’t the same as needing it.
Think of your expenses as essentials vs lifestyle. Your needs are the basic level of anything you need to survive. It’s clothing you need to not be naked. It’s food you need to not starve. It’s basic hygiene like soap and a toothbrush. Or what you pay to keep a roof over your head.
Your wants are anything that you don’t need to survive. It’s the new InstantPot or the wool coat with the matching beret.
Step 2: Determine how much you’re really spending on needs, wants and goals
After tracking your expenses, see how much you spent on needs and wants.
Amy enjoys eating out with her friends and going to brunch on weekends. She also enjoys taking DIY classes like pottery or cooking classes. Amy doesn’t have any debt and only saves whatever's left sitting in her bank account at the end of the month. She doesn’t have any huge savings goals, but she’d like to take a trip to Barcelona someday.
Below is what Amy’s discovered about her spending after tracking her expenses for a month:
You can see that the easy 50 / 30 / 20 budget will never work for Amy because that isn’t how she lives her life. Her needs and goals budget will always feel too roomy. And her wants budget will always feel super restrictive. And then Amy starts crying that her budget never lets her have any fun. Sound familiar?
Lucy also takes home $5,000 per month but she’s trying to pay off $20,000 in credit card debt. To throw more money towards her debt, she’s sharing an apartment with her bestie. Her budget looks like this:
The lesson here isn’t that a 50 / 30 / 20 budget is rubbish. It’s that creating a 50 / 30 / 20 budget because those percentages someone else advised it isn’t good enough.
Shift your mindset to see it as a Needs / Wants / Goals budget instead. One where the percentages are flexible and determined by your life and circumstances.
Step 3: Make your budget based on the percentages of Needs / Wants / Goals you’ve determined
Amy is now ready to create her budget for next month. But this time, she’s going to apply what she learned from tracking her expenses.
She’s creating a 40 / 55 / 5 budget because that budget reflects how she lives her life and what kind of life she wants.
This is what her budget looks like:
Needs = $2,000
Wants = $2,750
Goals = $250
Your budget should be like your diary. By looking at your budget someone who doesn’t know you should be able to learn something about your life. You can’t do that if your budget is a cookie cutter budget given to you by some money guru.
Step 4: Adjust your budget as you go
The good thing about keeping your percentages flexible is that you can still tweak and adjust it as you go. Try it out for one month while still tracking your expenses. You’ll notice your percentages changing over time based on your spending. That's totally fine.
You can also adjust your budget to make it more consistent with your goals. If you want to cut back on personal spending and put more towards your goals, adjust your percentages.
Lucy doesn't follow the 50 / 30 / 20 budget becuase she know's it isn't right for her. She adjusts her percentages to work with her life, not against it. She's still budgeting based on her Needs / Wants / Goals, but she's customising her budget to her unique life.
Is a 50 / 30 / 20 budget right for you?
Benefits of a 50 / 30 / 20 budget
Quick & easy
A 50 / 30 / 20 or Needs / Wants / Goals budget is a great place for budgeting beginners to start. It’s easy and super simple to understand. It also gives you flexibility to adjust it to your life, although that’ll need a bit more work.
Consider whether your expenses are essential or not
One of the key benefits of a 50 / 30 / 20 budget is that all you categorise your spending into needs and wants. This forces you to think about whether you need to be spending money or not. But it can make you feel guilty about spending money on yourself which is not what Paper Money Co is about.
Consistency in re-evaluating your budget
A 50 / 30 / 20 separates your lifestyle and essential expenses. This gives you room to re-evaluate your spending without being super strict.
Using the broad categories of needs and wants can also add a level of consistency to your budget. This is perfect for beginners who tend to freak out if they see their budget fluctuating a lot from month to month.
A good savings system for beginners
Setting aside a specific portion of your budget for goals is great for newbies to budgeting. It’s a great saving system for beginners that combines flexibility with simplicity.
I only recommend a 50 / 30 / 20 budget as a beginner budget for my students. It gets them used to the idea of setting a plan and tracking expenses. I don't recommend it as a long term solution if you want to take control of your finances.
Disadvantages of a 50 / 30 / 20 budget
Doesn’t prioritise savings & debt repayment
When you follow a 50 / 30 / 20 budget, it’s easy to get complacent and put debt repayments and savings on the back burner. Once you’ve got some portion of your income dedicated to your goals you fall into the trap of thinking that it’s enough.
But that isn’t always true. There’s nothing worse than thinking you’re making progress when you aren't going anywhere.
Harder to identify problems & cut expenses
The broader your budget is, the harder it is to control and cut any of your expenses. By lumping all your expenses into needs or wants, you can’t see where you might be spending too much money.
This makes it harder to see where you can cut expenses to put towards your goals. The lack of detail also makes it harder to see where your problem areas are.
I'm a huge comfort eater and comfort spender.
I know this because I track my expenses in specific categories like eating out and fun spending. Tracking my spending allowed me to isolate where I was overspending. I could only try to fix the problem once I was aware it existed.
But if all I saw was “wants” I'd know I was spending too much, but I wouldn't know where that money was going. And if you don't know where your money is going, you can’t correct any problems.
It’s the difference between knowing there’s a hole ‘somewhere’ in your vintage lace gown and knowing exactly where the hole is. If you know where it is, you can fix it up and keep a watchful eye on it to make sure you don’t tear it.
But when you don't know where it is you’re left worrying about it. You hope it doesn’t destroy your gown and being unable to fix it. The more information you have, the more control you have.
Determining your needs & wants can be vague
It can also be vague when it comes to determining the difference between a need and a want. Two 50 / 30 / 20 budgets won’t look the same because one person's want is another person’s need.
And that’s fine, because your budget should be customised to your life. But it's also hard to consistently decide what is a need and a want in your own life.
Percentages are unrealistic for low income earners
As with all percentage based budgets, a 50 / 30 / 20 budget doesn’t work as well for lower income earners. The lower your income is the more unrealistic any percentage based budget will be.
Sure, if you earn less you can try drastically cutting your expenses. But your costs can only be cut so low. You aren’t charged a lower price just because you earn less.
This means that everything you buy takes up a larger percentage of your budget. This makes percentages more unrealistic.
And the worst thing about that is that it makes you start feeling like you’re doing it wrong. Or that you suck at budgeting. And that isn’t true. Wearing the wrong sized shoes doesn’t mean you suck at walking. It means you’re wearing the wrong sized shoes.
The 50 / 30 / 20 budget is a great place for beginners to get started with budgeting. It forces you to consider whether your expenses are essential for your survival or a lifestyle choice.
It’s quick, simple to understand and easy to create with a touch of flexibility. One of the biggest issues with a 50 / 30 / 20 budget, though, is that it doesn’t allow full visibility over your expenses. It can also be difficult to determine the difference between a need and a want.