How to create a 50/30/20 budget and build your savings

Starting a budget can seem like a major undertaking, but if you choose the right budgeting method for your needs and stick to it, it can pay off in a big way over time. A budget can help you save more money, pay down debt and take control of your finances. If you’re looking to create your first budget or if your current budgeting system isn’t working for you, you may want to give the 50/30/20 rule a try. It’s a simple, straightforward budgeting method that’s easy to follow.

We’ll talk you through the details of the 50/30/20 rule of budgeting and give you helpful tips to get started. Then, you’ll be ready to make this easy budgeting system work for you!

What is the 50/30/20 budgeting method?

The 50/30/20 method is an easy-to-follow approach to budgeting created by Elizabeth Warren (yes – as in U.S. Senator Warren). It simplifies the budgeting process by having you put all your expenses into three buckets: wants, needs and savings. You’ll allocate 50% of your take-home pay to your needs, 30% to your wants and 20% to savings.

While more complicated approaches to budgeting have you itemize and sort every purchase, the 50/30/20 method looks at the bigger picture instead. By only thinking of these three main categories, you can spend less time on your finances.

How to create your 50/30/20 budget: A step-by-step guide

If the idea of saving time while still sticking to a budget sounds like an ideal solution to you, we’ll show you how to get started with 50/30/20 budgeting, step by step.

Here’s how you can make the 50/30/20 budgeting method work for you:

1. Calculate your take-home income

Before you can start categorizing your expenses, you’ll first need to know exactly how much money you bring in, after taxes and other deductions.

Your after-tax income is the amount you have left after all deductions. That can include things like:

• Income tax
• State tax
• Local tax
• Social security payments
• Medicare payments

If you’re an employee who gets a regular paycheck, figuring out your after-tax income should just require a quick peek at your pay stubs.

If you run your own business or work on a freelance basis, you’ll need to calculate your after-tax income yourself. It’s not hard to do – just subtract your business expenses and the amount you set aside for taxes from your gross income:

Your gross income – your business expenses – the amount you set aside for taxes = your after-tax income

2. Allocate up to 50% of your income to your needs

Now that you know how much money you’re bringing in after tax each month, you can get to work on your own 50/30/20 budget.

You’ll want to take a look at your expenses and figure out how much you currently spend on your needs – rent or mortgage payments, utilities, groceries, car payments and anything else that’s a necessity. These items shouldn’t add up to more than half your monthly budget.

If you’re currently over budget on these needs, you may want to think of ways of cutting back, like moving to a smaller apartment or getting roommates, or taking public transportation instead of owning a car.

Sometimes, even when you cut back, it’s just not possible to keep your essential spending below 50% of your income. If that’s the case for you, think of the 50% guideline as a goal to work toward. For now, just tracking exactly how much you spend on your needs is a great first step.