Finding Your Budgeting Style: Trying on the 50/30/20 Budget Rule

Not everyone dresses the same. Some people love a formal style: slacks, a long dress, suit and tie, heels, dress shoes, etc. Other people opt for a casual look: tee shirts, shorts, sweatpants, maybe sandals.

Whatever your style is, you want to pick clothes that fit and make you feel comfortable.

Similarly, there’s more than one way to budget. Whatever your annual income may be, or how much is in your bank account, budgeting is about finding the approach and tools that fit you best.

Time out! If you want one valuable and free tool to start off with, check out some tips on using a budget worksheet.

Overall, everyone will have a different style of budgeting. What matters is that you’re taking control of your finances.

One popular approach that simplifies budgeting while ensuring financial health is the 50/30/20 budget rule.

This rule provides a clear framework for setting aside take home pay for different personal finance priorities: needs, wants, and savings.

Let’s take a closer look at this budget rule and how you can apply it to your own financial situation. By the end, we hope you’ll know whether you want to try it on for size.

Kikoff Keys

If you’re in a rush, we can summarize for you. Check out the basics below:

  • This budget rule is a way to manage money that says you should spend up to 50% of your monthly after tax income on needs – in other words, spend half your money on things that you must have or must do.
  • The other half should be split, using 20% for savings and debt repayment and 30% for anything else that you might want.
  • The rule is a basic template to help people manage their money, and balance paying for necessities while still putting money in an emergency fund and/or retirement account.
  • People who follow this rule can simplify it by setting up automatic deposits, using automatic payments, and tracking changes in annual income.
  • Whatever your long term goals are, Kikoff provides fair, effective, and simple tools that empower you to meet your financial goals.

Explaining the 50, 30, 20 Budget

This budget rule is a straightforward guideline that divides your monthly after tax income into three spending broad categories:

  1. 50% for Needs
  2. 30% for Wants
  3. 20% for Savings and Paying Off Debt

1. Needs (50%)

The largest portion of your budget, 50%, is allocated towards covering essential expenses—things you must pay for to sustain your basic lifestyle. These necessities typically include:

  • Housing Costs: Rent or mortgage payments, property taxes, homeowners’ insurance.
  • Utilities: Electricity, water, heating, internet, and phone bills.
  • Transportation: Car payments, gas, public transit fares, insurance, and maintenance.
  • Food: Grocery bills and essential household supplies.
  • Healthcare: Health insurance premiums, prescriptions, and medical expenses.
  • Minimum Debt Repayments: Required payments towards credit cards, loans, or other high interest debt.

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By ensuring that your essential expenses do not exceed 50% of your after tax income, you create a stable foundation for your budget, reducing the risk of financial strain.

2. Wants (30%)

The next category, making up 30% of your budget, is reserved for discretionary spending — things that you like and that impact your quality of life, but are not absolute necessities. These purchases can include:

  • Dining Out: Restaurant meals and takeout.
  • Entertainment: Movie tickets, concerts, streaming services.
  • Travel: Vacation expenses.
  • Hobbies: Sports, shopping, personal interests.
  • Luxuries: Non-essential purchases like electronics or jewelry for example.

Setting aside a specific percentage for things you want allows you to enjoy yourself and find flexibility in your budget while still maintaining control over your spending.

3. Savings and Debt Payments (20%)

The remaining 20% of your budget is dedicated to building financial security and reducing debt. This category includes:

  • Emergency Fund: Savings for unexpected expenses or financial emergencies.
  • Retirement Savings: Contributions to retirement accounts like a 401(k), individual retirement account like an IRA, or pension plans.
  • Investments: Any money you put into mutual funds or the stock market.
  • Debt Repayment: Paying down high-interest debts like debt on credit cards and personal loans.

Prioritizing savings and debt repayment ensures that you are actively working towards future goals and reducing any debts or liabilities.

What About Taxes? Where Do They Fit In?

Taxes are usually NOT included when you calculate the 50-30-20% rule. The reason is that this rule focuses on setting aside your income after all income taxes are subtracted from your gross pay or gross income – basically, the total money you get from your job every pay period.

You should use your after-tax income or net income when you use the rule, instead of your gross income.

Just as a refresher though, the different types of income taxes to think about when looking at your taxable income and budgeting are federal taxes, and then state and local taxes.

  • Federal Income Tax: federal income taxes are taken out of an employee’s gross pay wages by the federal government
  • State Income Tax: state income taxes are taken out of your gross income if you earn it anywhere in the state you where you live
  • Local Taxes: local taxes are taken out of your gross pay by certain counties, cities, and school districts. They are more rare and generally don’t make much of an impact on your adjusted gross income.

Applying the 50/30/20 Budget Rule

Now that you understand the breakdown of the rule, how can you apply it effectively to your own finances?

  1. Calculate Your After-Tax Income: Determine your monthly income after all taxes (federal income tax, as well as state and local tax). That number is your net income.
  2. Identify Your Essential Expenses: List out your monthly fixed expenses like rent, utilities, transportation, food, healthcare, and minimum debt payments for example.
  3. Allocate Your Budget:
    • Needs (50%): Compare your essential expenses against your total income. Adjust as needed to make sure you don’t spend more than 50% of your income.
    • Wants (30%): set aside 30% of your income for “discretionary” spending. Don’t just throw away extra money on silly stuff, but spend money on things that bring you joy and fulfillment.
    • Savings and Debt Repayment (20%): Direct the remaining 20% towards savings, investments, and debt repayment. You can set up automatic transfers to a savings account or retirement account.
  4. Review and Adjust Regularly: Regularly review your budget to make sure you’re staying within the percentages. Adjustments may be needed based on changes in your annual salary/monthly income/hourly wage or expenses.

Benefits of the 50/30/20 Budget Rule

Going with the 50/30/20 budget rule offers some key advantages:

  • Simplicity: The rule provides a clear and simple framework for budgeting, making it accessible for you, even if you don’t think your financial literacy is the strongest.
  • Balance: By dividing your income into distinct categories, you get a balanced approach that prioritizes both immediate needs and long-term financial security.
  • Flexibility: The rule allows for flexibility within each category depending on different lifestyles and money goals.
  • Discipline: Following this rule encourages responsible spending and savings habits, which builds good financial discipline over time.

The Rule in Practice

Let’s look at an example of how someone can take all this valuable info and use it to divide their income up into the right categories.

Let’s say George has $2,500 in monthly income after federal, state and local taxes. According to the rule, that would mean he’d have:

  • $1,250 set aside for his rent payment, credit card payment, and other set expenses.
  • $750 left for meals out, entertainment, and anything else he “wants.”
  • $500 of income left for savings and retirement contributions

Conclusion

To budget effectively, you need to find your style. The 50/30/20 budget rule serves as an excellent starting point for organizing your finances.

It helps you meet essential needs, spend a responsible amount on what you want, and prioritize savings and debt reduction.

By implementing this rule consistently and adjusting it as you go, you can personalize it to make informed decisions about how you spend your money.

Whatever your long term goals are, Kikoff provides fair, effective, and simple tools that empower you to meet your financial goals.

The information provided in this blog post is meant for informational purposes only and does not constitute financial advice. Kikoff Inc. is a financial technology company and not a bank. The Kikoff Secured Credit Card is issued by Coastal Community Bank, Member FDIC. Terms and conditions apply & individual results may vary. Make consistent on-time payments to maximize credit building potential.  Credit factors outside Kikoff, like other account balances or delinquencies, can have an impact on credit building progress.  Subject to approval via identity verifications and subject to terms and conditions. Kikoff Credit Account reported line of credit intended exclusively for credit building purposes & can be used to finance the purchase of monthly Credit Service plans and/or digital educational material via the Kikoff Store. For more information, visit our Terms and Conditions and Privacy Policy. We report to the major credit bureaus: Equifax, Experian, and TransUnion. Features, tradelines, bureau reporting, & pricing may vary depending on plan purchased. This post may contain marketing messages and advertisements in compliance with the CAN-SPAM Act. Please refer to our Secured Card and Credit Account Terms for detailed product disclaimers.

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