We’ve all heard it before. The first step to saving money is budgeting. But how do we start budgeting when we’re bombarded by so many budgeting methods that people swear is the “right” one?

I’ll admit it. I don’t keep a strict budget. I use the app Mint to track my spending and my idea of budgeting used to consist of keeping some categories that I can actually control like eating out and shopping down.

But as I started diving into budgeting strategies I realized some people have really strong opinions on how to budget. I can’t say what’s right and wrong for you.

But what I will do is introduce the 50/30/20 budget rule. This is a method many people swear by and while you can tweak it to your own circumstance, knowing the basics of this method will help you to get started on creating your own budget.

Why You Need a Budget

Before we go into this, let’s start with why you need a budget. You need a budget to predict how much money you are spending and how much you actually spend. It is a great way to actually see where your money is going to.

You’ll be surprised to find how much extra money you can save by finding out where your money is going on a daily basis. I promise you, no matter how responsible you are with your money, you will still encounter surprises when you create and manage your budget.

The 50/30/20 Rule

The 50/30/20 Budgeting Rule is a tool more than anything else. It helps you organize your budget by breaking down where to put your money into three categories: needs, wants, and savings.

50% Needs

50% of your budget should cover your needs. This category includes essentials such as rent/mortgage, utilities, groceries, health insurance, minimum payments on debt, and transportation. Basically, any payments that you cannot live without, such as your rent to have a roof on top of your head is considered a need. 

30% Wants

Wants are exactly what it sounds like. They are things that you won’t die without but you still want to have or do. These include dining out, entertainment, shopping, cable subscription, cell phone bill (nope! you won’t die without your cell phone), and hobbies.

20% Savings

Everything else that you do not need or want should be saved. This should make up 20% of your take-home pay.

So how do you start creating this 50/30/20 breakdown?

Step 1: Calculate your take-home pay

Your take-home pay is the after-tax income that you actually see in your bank account after tax, social security, and 401(k) has been deducted from your pay. Some people would consider 401(k) as part of the “saving” breakdown but personally, I like to think of my 401(k) as money I can’t touch until retirement. My 20% saving, I think of the money I can pull anytime so I do not include 401(k) in my calculations.

Step 2: Calculate and limit your “needs” to 50% of your income

For the most part, your needs are very apparent. Clearly, housing, utilities, and groceries all fall into necessities. But there will be some gray areas. Your “needs” should include the minimum payments on student debt and credit card debt while extra payments you make to your debt should come out of your savings.

Ideally, you should aim to spend less than 50% of your income on your needs. If you do spend less than 50% of your income on your “needs” that is more power to you because that’s money that can instead go into your “wants” or “savings” categories.

Step 3: Calculate and limit your “wants” to 30% of your income

It’s pretty easy to calculate your wants. Your wants are basically everything else you buy that is not part of your “needs” category. This includes cable subscription, cell phone bill, shopping, eating out, and entertainment.

This category is going to be where you have the most control over. There is not much you can do to lower your needs but you can definitely cut back on your wants.

Just like your “needs” category, if you spend less than 30% of your income on your wants, you can instead put more money into savings. So be sure to budget no more than 30% of your take-home pay for your “wants” but keep in mind that the lower the amount, the better.

Step 4: Calculate and allocate your 20% savings

In my opinion, the best part of the 50/30/20 budget rule is that you’re guaranteeing yourself at least a 20% saving each month.

So what should you do with the 20%?

If you have student loans, you should prioritize making extra payments, but only after you have saved up enough for an emergency fund.

As for how much should you save for an emergency fund? Well, that depends on your risk tolerance. Financial guru Dave Ramsey recommends only $1,000 in an emergency fund while you aggressively pay off your debt. I personally keep a 3-month emergency fund while I know others who keep up to 6 months worth of emergency fund.

Once you have an emergency fund and have paid off your student loan, you have more liberty to invest your extra saving or to pay off other debt such as a mortgage.

Your choices are limitless at this point! You just have to take the first step and actually create a budget.

Tweaking the 50/30/20 Breakdown

Of course, you don’t have to completely follow the 50/30/20 breakdown in creating your budget. For example, in my case, my breakdown is 32/28/40. I spend 32% on my needs (living at home is the reason why I am able to cut my “needs”).

I spend 28% on wants, which leaves me with 40% on savings which I allocate the majority to paying off my debt (and hence how I was able to pay off $50,000 debt in 7 months).

The simplicity of the 50/30/20 budgeting method was what drew me in but I found that the ease at which I could make adjustments was what really won me over. Since implementing the 50/30/20 budget method, my spending on “wants” have never gone above the 30% as allocated, allowing me to save almost 40% of my take-home pay every month to put into my savings and into making extra payments on my student loans.

Needless to say, I am a fan of this method!