Budgeting 101: The 50/30/20 Budget


50-30-20 rule

Ah yes. The dreaded “B” word. A seemingly simple task that many of us just avoid talking about. In fact, according to a Gallup Poll, only about a third of American households make a budget. With so few of us having a grasp on what’s coming in and out each month, it’s unsurprising that so many Americans are also in debt.

Budgeting is more than just passively tracking your expenses and your income; a good budget balances life’s necessities with short and long-term goals, along with a bit of extra fun. Besides, what’s the point in earning money if you can’t enjoy any of it? The key, as they say, is moderation.

A simple but effective method to budgeting is the 50/30/20 Budget. The basic premise of 50/30/20 is simple, and it divides your monthly (take-home) income into three main buckets.

50% (or less): Essentials

This is the biggest section and includes things like housing, food, insurance, utilities, and transportation. Anything that’s essential falls under this category. It’s the biggest allocation, but often one of the hardest to minimize.

50% may seem high to some people – and depending on your income and personal situation, it may be. But if you live in an apartment with extremely high rent – something like San Francisco or Santa Monica (where you can find the highest average rent in the US), chances are that your essentials could easily chew up more of your monthly income on rent alone. Keeping expenses to a minimum in this category is possible though; instead of owning a car (and having to pay for the insurance associated with it), see if public transportation is an option for you. Moving to a cheaper apartment, or somewhere closer to where you work could also be viable options.

The biggest things I’ve done to help keep this category down for Kristin and me is down-sizing to one vehicle. It was easy at first; I could walk a mile and a half to work. But then, I got laid off, and now I am back on public transportation. It’s less convenient (as can be expected at about 20 miles away), but instead of paying $80-$100 a month on car insurance, plus gas and wear and tear on the car (not to mention it was leased), I can now take the bus and train for $85 a month. It’s got the added advantage of giving me dedicated time each day to continue to read – about 45 minutes each way – that I would have otherwise spent stuck in traffic, frustrated.

A few things in particular to note about this category: while I do lump “food” under this, that only really pertains to groceries. Going out to eat falls under the next category, and is a huge money pit if you go out to eat often. Preparing your own food at home is not only less expensive, but it’s often much healthier and can be a great way to bond with a spouse or partner.

30% (or less): Personal/Fun Money

Ah, the fun stuff. Yes!! This is what working and earning is all about: being able to enjoy the things in life you want to. Like I mentioned earlier, things like going out to eat – or going to the bar with friends – along with basically anything in your life that isn’t essential falls under this category. Because it’s so broad, this has the potential to be the biggest area of over-spending. That also means that it can be a great area to find extra savings.

Your morning coffee? That for me falls under Personal. You don’t need to spend money every day on coffee. Your coworkers may tell you otherwise if you’re like me, but there are plenty of ways to get your fix in without dropping $5 at Starbucks (or Caribou if you’re lucky enough to have those by you) every single day.

Other ways to cut back in this category are relatively simple; for example, start cutting back on how much you go out to eat by eliminating one time a month. Over time, increase that until you’re preparing more of your meals at home and eating out less. Who knows, maybe – like me – you’ll find that you actually really enjoy cooking! It’s quite surprising how much money you can save if you just don’t go out to eat as often.

20% (or more): Savings

Time for the responsible adult in you to shine. You don’t spend this money, you don’t get to enjoy it now. But building a strong habit of savings will let you enjoy it much more later in your life. It also gives you peace of mind in the moment, which is plenty worth having the cash just sitting there, in my opinion. Saving in this category isn’t about socking away into a 401(k), though. Do you have an Emergency Fund? How big is it? What sorts of additional longer-term investments do you have?

A staggering 59% of American’s wouldn’t use cash to cover a $500 emergency. That’s ridiculous, and worrysome. How much you “need” in an emergency fund varies depending on your specific circumstances, but a buffer of 3 months of expenses is a good basic start. I’d encourage something closer to 6 months, with more months if you’re self-employed or have irregular income, or would anticipate needing a long time to find work again. See how I’m not talking about a specific dollar amount? Just like the 50% of money allocated to essentials may seem too much or too little, how much you need in an Emergency Fund will vary based on how much money you spend in an average month.

Other things in the Savings category include investment accounts or money being used to pay off high-interest credit card debt (which most Americans have far too much of).

My Preference

As you find out what your level of comfort is, and how aggressively you want to cut back on your expenses, these allocations will adjust. That’s okay – that’s the entire point of making a budget and tracking your expenses. I personally like to flip the Personal and Savings allocations, and put anything extra I possibly can into savings. This helps keep us on track and feel more comfortable with job changes; voluntary or otherwise.

Getting Started

The first step is tracking your expenses. Tools like Mint or Personal Capital let you plug in your account information and then automatically categorize transactions. This can be a sobering experience, so if this is the first time you’ve really taken a look at your finances and  you’re worried about how this is going to pan out, grab a beer and your computer. Looking at your expenses should be a no-guilt assessment. What Past Dave did is entirely on Past Dave. Future Dave, though…he’s the guy I’ve got to convince to make the changes I want to see.

After categorizing your expenses (most automated tools like Mint or Personal Capital will do a pretty good job but leave some things uncategorized), group them according to the 50/30/20 rule and see where you land. From there, you can figure out where you need to make changes. Key places to look out for that are relatively easy to tackle include your food/restaurant budget, alcohol (if you drink), and clothing.


If you find yourself spending money as soon as you get it, automation can come in handy. By putting your finances on auto-pilot, you force yourself to save. Saving up for a down payment on a house? Open up a separate savings account, preferably at a bank that offers (relatively) high yields. My personal favorite is Capital One 360 but there are many to choose from. Then set up automatic transfers – these work best either monthly, weekly, or whenever you get paid (for example the 15th and last day of each month). For the extremist, you can also check with your Payroll department to see if there’s a way you can split up your paychecks before you even see them. This is particularly useful if you have a targeted savings account at a different financial institution than where you do your regular banking.

Regardless of how you do it, do it. The first step is the most important. Being in charge of your finances is an ongoing journey for the rest of your life. Make the decisions today that will set you up for a better tomorrow. And don’t forget – this is take-home pay. That means you should still be putting money away into a 401(k) or other retirement plan if your employer offers it. If they offer a match, that’s free money that you’d be crazy not to capitalize on.


What’s your preference on how you budget? What tools do you use to help you keep track of your expenses? Answer in the comments!

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