If you’re new to budgeting, figuring out how to manage your money can feel overwhelming. Not only do you need to organize your income and expenses, you also have to make difficult decisions about how to spend your cash.
A good way to keep it simple is to consider using a percentage-based budget that divides up your monthly after-tax income into categories. One of the most common types of percentage-based budgets is the 50/30/20 rule. The idea is to divide your income into three categories, spending 50% on needs, 30% on wants, and 20% on savings.
Learn more about the 50/30/20 budget rule and if it’s right for you.
Your necessities are usually your living expenses and should account for 50% of your after-tax income. Necessities are things you need that aren't optional. They're different from your wants, which are things you'd like to have but don't need to survive.
Examples of necessities include:
How much you need for your necessities may change over time. If you pay off your student loan, for example, you'll have some extra money in your necessities budget that you can use for other expenses. You could use it to make higher monthly payments on your vehicle loan, mortgage or another loan, for example, which could help you pay off your debts faster.
Your wants are things you'd like to have but aren't necessary for survival. They're different from things you're saving for, like a house or vacation (these are your long-term savings goals and are included in the "savings" section of your budget). Wants should account for 30% of your after-tax income.
Examples of wants include:
Spending money on things you want is a great way to reward yourself for working hard. You can use it to motivate yourself to accomplish goals, for example, which may improve your quality of life and personal fulfillment. Your wants can also change over time. When you mark an item off your list, you can then add another to help you stay motivated to achieve your next goal.
In the 50/30/20 rule, the remaining 20% of your after-tax income should go toward your savings, which is used for heftier long-term goals. You can save for things you want or need, and you might use more than one savings account.
Examples of savings goals include:
Depending on your employer, you may be able to automate your savings, which can make it easier to achieve your goals. If you're paid by direct deposit, you may be able to set it up so that 80% of your income is deposited in your checking account for your needs and wants. For the remaining 20%, 10% could go to savings accounts for your emergency fund and other long-term goals, and the other 10% could go to your retirement savings.
The 50/30/20 rule can be a good budgeting method for some, but it may not work for your unique monthly expenses. Depending on your income and where you live, earmarking 50% of your income for your needs may not be enough. For example, if you live in a high-cost area, you may have to put a large part of your income toward housing, making it difficult to keep your needs under 50%. So, you may need to adjust the percentages to fit your situation.
The categories also may or may not work for you. You might find it easier to track the three categories rather than categorizing each individual expense. Or you might find the lack of detail makes it harder for you to improve your spending habits.
If you try the 50/30/20 budget method and don't hit the percentages exactly, be kind to yourself. You may be able to meet those numbers in the future. For example, when you've paid off your student loans, you can allocate more of your monthly budget for savings.
Ultimately, you need to decide what type of budgeting system is right for you based on your habits and circumstances. Luckily, you can use resources like the calculator below to figure out how much green goes in each of your buckets.
Your retirement savings are an important part of the 50/30/20 method. In the "savings" section, you can apply some or all of the 20% you save to your 401(k), IRA or other retirement account. Usually, your employer deducts your 401(k) savings automatically from your paycheck, so you'd factor in those savings from your gross pay vs. your net pay.
A monthly budget is a guideline to help you use your money wisely and meet your financial goals. You can modify your 50/30/20 budget whenever your goals change or you have an urgent need.
The 50/30/20 rule is designed to help you reach your long- and short-term goals. For example, expenses in your "wants" category are typically short-term goals, while your "savings" category is usually for long-term goals.
The 50/30/20 budget can be a simple and effective way to structure your finances. To get started, review your financial situation and goals, and come up with a formula that works for you. Whatever budgeting method you choose, it will only work if you stick to it. However, remember to be kind to yourself if an extra "want" sneaks in once in a while and your budget numbers aren't perfect for a month. It's all about balancing your priorities as you work toward your larger savings goals.
Wherever you are in your financial journey, Citizens is here to help — with banking that stands with you and grows with you. A Citizens savings account is ideal for the "savings" part of your budget. With automatic transfers from your checking to your savings account, you can set money aside and watch your savings grow. And with Citizens iQ™, you can stay on top of your finances with personalized spending and saving insights in our mobile app.1
Take this quiz to determine your savings personality and learn some tips to reach your financial goals.
Start savingCheck out this list of barriers to see which could be holding you back from saving as much money as you could.
Learn moreIt’s easy to get overwhelmed with savings goals for your now and for your future. We have some tips on saving for multiple goals at once.
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Disclaimer: The information contained herein is for informational purposes only as a service to the public and is not legal advice or a substitute for legal counsel. You should do your own research and/or contact your own legal or tax advisor for assistance with questions you may have on the information contained herein.