How to Budget Your Money With the 50/20/30 Guideline

Laura Shin
Posted

When it comes to money, there’s certainly no shortage of ways for us to spend it—food, rent, retirement accounts, a down payment on a house, gym memberships, gifts … you get the picture.

In fact, it’s why LearnVest Planners are often asked one key question: “So where should my money be going?”

When it really comes down to it, the answer is different for everyone. You may be in a hurry to pay off debt, so you’re willing to spend less on eating out in the meantime. Or you might live in a city where rent is prohibitively expensive, so you have to allocate more of your paycheck to housing.

So what’s a budget-perplexed person to do? While we can’t give you a hard-and-fast rule for where to put your money, we did come up with a general benchmark to consider if you’re just starting to set up a budget: the 50/20/30 guideline.

Whether you’re a parent with two kids or a recent college grad working your first job, this 50/20/30 guideline can help you not only figure out how much you may want to allocate to each area every month; it can also help you determine the order in which your money can be allocated.

50/20/30 Broken Down

The 50/20/30 guideline can be easy to follow because instead of telling you how to break down your budget across 20 or more different categories (who could possibly keep track of that?), it splits everything into three main categories:

1. Fixed Costs
These are bills and expenses that don’t vary much from month to month, like rent or mortgage payments, utilities and car payments. We also include subscriptions, such as gym memberships and Netflix accounts, in fixed costs because you’re committed to paying them on a monthly basis.

When it comes to fixed costs, we generally suggest that you aim to keep your monthly total no more than 50% of your take-home pay.

Tip: If you’re trying to make more room in your budget, fixed costs can be a great place to trim. For example, are there any bills or subscriptions you could reduce or cancel entirely?

RELATED: The One-Number Strategy: A New Approach to Budgeting

2. Financial Goals
Consider putting at least 20% of your take-home pay toward important payments or contributions that will help you secure your financial foundation. At LearnVest, we believe there are three essential goals everyone should strive for: paying down credit card debt, saving for retirement and building an emergency fund. But your financial goals can also include larger savings priorities like a down payment on a new home.

Tip: LearnVest Planners recommend automating your savings contributions and debt payments to help make sure you’re saving consistently—and to help ensure you don’t miss a payment!

3. Flexible Spending
Finally, consider budgeting no more than 30% of your take-home pay toward flexible spending. These are day-to-day expenses that can vary from month to month, like eating out, groceries, shopping, hobbies, entertainment, or gas.

We include groceries in flexible spending because even though food is a necessity in your budget, how you spend on food can vary. Some weeks you might eat out more, while others you may buy more groceries to cook at home. At LearnVest, our Planners often say that it doesn’t really matter what you spend your money on each month in this category, as long as you’re aware of your spending and not going over your total flex budget each month.

Tip: To determine your flex-spending amount, we recommend first subtracting your fixed costs and financial goal contributions from your take-home pay (the amount that hits your bank account after taxes and any 401(k) contributions). This way, you’ll know that the amount that’s left for flexible spending is truly yours to spend however you want.

RELATED: 14 Smart (and Easy!) Tricks for Cutting Costs in 2014

Seeing 50/20/30 in Action

The 50/20/30 guideline is just that—a guide. It can be a helpful benchmark when you’re assessing where your money is going, but it can also be adjusted to your specific lifestyle and goals.

To better explain what we mean, let’s compare two hypothetical budgets—one for Molly and one for a couple, Sarah and Tim.

RELATED: The 3 Times I Used My Emergency Fund: Was I Right to Dip Into It?

Molly

Molly is a 22-year-old recent graduate with her first job, working in Chicago. She has student loans, but she is still able to meet her student loan payment every month and contribute to a Roth IRA, plus pay all her bills.

Her income: $36,000 a year

Her take-home pay after taxes: $2,250 a month (we’re assuming 25% of her salary goes toward a combination of taxes and her 401(k) contributions)

Fixed Costs:
Rent: $775
Transportation: $115
Utilities (including phone and internet): $135
Gym and subscriptions: $75
Total: $1,100, which is about 49% of her take-home pay

Financial Goals:
Student Loan: $150
Roth IRA contributions: $200
Emergency fund: $75
Backpacking trip fund: $50
Total: $475, which is about 21% of her take-home pay

Flexible Spending: $675, which is 30% of her take-home pay

Because Molly is on a tight budget, her fixed costs are very close to the 50% limit. Still, she is able to make her student loan payment and even put 9% of her take-home pay toward retirement, where the money should have a long time to grow.

RELATED: 5 Money Mistakes Even Good Savers May Make

Sarah and Tim

Sarah and Tim are in their mid-40s and have two children nearing college age.

Their household income: $150,000 a year

Their take-home pay after taxes: $8,750 a month (we’re assuming 30% of her salary and her husband’s go toward a combination of taxes and their 401(k) contributions)

Fixed Costs:
Mortgage: $2,000
Car payment and insurance: $775
Gas: $275
Utilities (including hone, TV and internet): $275
Total: $3,325, which is 38% of their income

Financial Goals:
Roth IRA contributions: $900
529 account contributions: $1,400
Family trip fund: $400
Emergency Fund: $535
Total: $3,235, which is about 37% of their take-home pay

Flexible Spending: $2,190, which is about 25% of their take-home pay

Sarah and Tim’s situation shows that you don’t need to stick hard and fast to the 50/20/30 guideline. The benchmark for fixed costs is “no more than” 50%, and Sarah and her husband have actually been able to keep them well below that threshold. They paid off one of their cars a while back and their mortgage payment is well within their means. 

Because they’ve kept their fixed costs low, they are able to contribute to their kids’ 529 accounts. At the same time, they are on track to max out their Roth IRA contributions because saving for retirement is a higher financial priority for them than saving for their children’s college funds. That’s because you can borrow for a college education later if you need to, but you can’t borrow to cover retirement! Sarah and Tim are balancing their desire to save for their children’s future education without sacrificing their own retirement needs. 

In order to make room for 529 savings, they have decided to limit their flexible spending to only 25% of their take-home pay.

One Note About Retirement

As you might have noticed, the 50/20/30 guideline applies only to take-home pay. Any contributions you make to retirement before your paycheck hits your bank account are not included. For that reason, you may actually be contributing more toward your financial goals than this breakdown would suggest. And you may find that it’s a good thing to keep that retirement money out of sight, out of mind!

RELATED: 6 Common Retirement Savings Mistakes to Avoid

(If you are self-employed and don’t have your retirement contributions withheld from your paycheck, consider contributing more than 20% of your take-home pay toward your financial goals, if you can afford it. This could help you make sure you’re contributing enough to stay on track for retirement.)

How the 50/20/30 Guideline Can Apply to Your Own Budget

If you’re just starting to put together a budget, the 50/20/30 Guideline can serve as a useful benchmark for how to divvy up your paycheck. When it comes down to it, though, how you spend (and save) your money depends on your specific goals and lifestyle.

As part of the LearnVest Action Program, you can work with a dedicated Planner who can give you a clear plan of action for your money, including helping you to create a budget that has the right balance for you. If you’re curious, you can get started by trying out our online budgeting tool for free.

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LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc. that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. Unless specifically identified as such, the people interviewed in this piece are neither clients, employees nor affiliates of LearnVest Planning Services, and the views expressed are their own. LearnVest Planning Services and any third parties listed in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies.

  • SoCal jones

    Unrealistic. Where’s property taxes? Supplemental taxes? HOA fees? Mello Roos? Is that part of mortgage? $1200 for mortgage and property taxes are not feasible in southern California. That would mean $800-900 for mortgage for this example. That would barely cover rent here in an undesirable neighborhood. Even a cost of living adjustment would not work.

  • bill

    Best financial advice I have ever seen on the web.

  • JJJ

    Are you nuts?! These examples are worthless…..student loans are typically much more than that, especially grad school or other advanced training. Not to mention, utilities…$75…$150?! Where, when?! Electricity, heat/ac, gas, oil, or wood, cell/phone bill, internet, garbage, water/sewer, car/health insurance, groceries….where could I possibly go that total utilities would be that little?? $1200 mortgage, unrealistic in many places. Not everyone has the funding or connections available to up and move to wherever mortgage/rent payments are so cheap. Rent, utilities, along with debt (student loans, etc) eat up all of our income and then some…you can only budget with what you have. You can’t even rent the American dream anymore. :

  • Vince C.

    $70 or$150r utilties? Mine are about $68 for water, garbage,sewer (the minimum), $50 for electric,$50 for natural gas, $38 for land line phone, and $78 for extended basic cable. No internet no cell phone no home security system, etc.

  • Sean

    It is interesting that this site is taking credit for coming up with the 50/30/20 rule when it was really devised by professors Elizabeth Warren and Amelia Tyagi in their book “All Your Worth: The Ultimate Money Plan” published a few years ago…

  • Beachn4fun

    health insurance is not listed because we all expect someone else to pay for it. Even the writer of this short essay. Cost on average, min. of 800 dollars per month for a family of four and should be listed as part of essential expenses.

  • Haarold

    Ha! Ha! Ha! 50% eh? How about 100% for essentials minus the $13 “extra”!

  • Hungry Jack

    I’m just wondering how skinny the family of 4 with 2 teenagers is when they only spend $400 / month on food. That’s only $25 / week each! Budgets are easy in a magical world.

    • camwiest

      I agree, that is pretty low. They could probably eat well on $600 though.

  • Pascal10

    I can’t believe these numbers are realistic. I live in a dump in Delaware for $740 a month….are there really livable apartments in Chicago for $750 a month??? In northern Delaware if you want your rent to be under $700 a month you need to sleep with a gun under your pillow. I can’t believe that Chicago isn’t a lot more expensive.

  • Andrew

    I eat ONE MEAL PER DAY plus antacids when I’m going hungry and get some heartburn. That’s 30 meals. Each meal is approximately $10 (pretty modest meals too), probably spend $20/month on TUMS and/or Pepto. Thus, my food expense even in this circumstance is, depending on the number of days in the month, $300-$330.

  • G

    $150 for utilities? This is usually 1 utility bill (electric) and there is still gas and water to pay for….and what about a cell phone/Internet? this article is a little off-base on what “real-world” expenses really cost…

    • camwiest

      Perhaps you should evaluate your bills. We paid $16 for gas, $30 for electric, $40 for internet and $54 for water/garbage/recycling. $140 for the month of June

      • jennyct

        $120 minimum for all refuse collection per year, and utilities based on the size of your home.

  • Realist9787

    Childcare might be listed as a Lifestyle Choice because it is (well it should be) a choice to have children or not. I know that sometimes it doesn’t happen that way. But one thing that is very clear to me from the comments here is that most people can’t afford to take care of themselves, never mind children!

    I agree the numbers in the examples are not realistic. But as many of you have tried to apply them to your situation, you find it impossible. Most of us did not learn how to budget when we were growing up, either from our parents or from school. And I would bet that most people don’t sit down and crunch numbers before deciding to have a child. I’m not saying people don’t have the right to have children, but many can’t afford them.

    • jennyct

      So you think having children should be relegated to the most successful people?

  • greeniemiss

    As a single working mother, I would hardly call childcare a “voluntary and fun” lifestyle choice.

  • Carol Wilson

    Ha! Ha! Ha! Try living on Social Security. I get 1010.00 a month and 50% goes for Rent. Utilities 65, No student loan, Can’t buy a car when mine was stolen(only Tex low cost insurance because car was 1989). Now eliminated insurance and cost of car when I was spending 35 dollars on oil because some idiot welded the oil pan instead of putting a new one on. I ride buses and heard about their accidents. I pay 24 dollars on travelers insurance for my grown children to get rich ething happens to me on vehicles,trains,buses, and planes. So how’s your budget. Try to save for last trip to Calif, then buy a dog to protect me from possums that come every year under my ramp/porch and try eating imbetween checks. Since the Navy won’t give me the Pension and Purple Heart after 50 years when Vietnam was going on, I don’t live very well because of them. So how’s your budget? Original Check from Social Security after taking care of Husband(dieing from alcohol and smoking? 525 a mo to live on in 2003. That’s the raise on my social Security. Because Boys and Girls, our Govnment doesn’t give you his SS because I was on Disability when he died. If your on that, they make you wait until(Me)Im 66 which I did. Ended up on Food Stamps and the tightest budget you ever saw. Served in the Navy in Personel taking care of 25000 guys records and getting men’s files and getting Meningitis. Now Im in a wheelchair with old age osteoarthritis and a disintegrating spine.

    • jennyct

      The dirty little secret is that retirement is tough, even if you do have money. I was in the physical therapists office today and it’s shocking to see how the body deteriorates by the time you’re 60.
      Don’t give up…

      • Carol Wilson

        That’s true.. I haven’t tried for many years therapy but you know the VA never would admit that the meningitis was on the Base in San Diego,Ca. I’ve been in Texas over 50 yrs with a trip to have my last daughter in San Diego,Ca. Everyone were Texans but me so I had to have her there. My tail bone was affected by the meningitis so the Doctor I had told me her head was stuck thereby a C birth. She was the last. My back was tolerable through the years, but in my 60′s, it’s intolerable. I do enjoy my laptop and I want one last trip to Disneyland before the big 70. All the VA has done for me is give me large bottles of very strong Tylenol but not T-3. Some kind of Ben-Gay made by an off brand and believe it works great. I sleep very well. Now in my after 65, the pain is so much more and if I lay in bed, it’s worse. I could have had my pension this week but 3 Big Wigs in the Military looked at my records and refused once again to give it to me. LIFE would be a little tolerabe if I had gotten it. I have Osteo arthritis now too. I suppose if GOD wants me to have it; HE will arrange it. I will have to trust in him. God Bless all of you. Make good decisions the best you can and TRUST IN GOD. A whole lot of Men got the same Desease and now live quite well. Discrimination???? I don’t know!!!!!!!!!!!

        • jennyct

          I’m sorry to hear that. I am thinking of going for my master’s (PA) because I don’t trust some doctors. At least I’ll have some access to healthcare ;) . Be careful of the Tylenol, it’s hard on the liver. If you can do your own research, take the time (university access to pub med). See if they’ll cover counseling with a specialist that handles chronic health issues. Good luck.

  • Derp

    Molly’s numbers are a joke. 25% covers ALL her tax liabilities, 401k, healthcare, dental and/or flexible spending account contributions? Nope. Not a chance.

    $36k is the 15% bracket. If she makes $36,250 that goes up to 25%. The state of IL also takes 5%. On top of that I’m pretty sure Chicago has a city income tax, as most major cities do.

    $75 for utilities? I don’t know anyone that pays just $75 for heat and electricity per month. Maybe in a really mild climate, but we’re talking Chicago. Scorching in the summer, freezing in the winter. No way. And how would she communicate with the outside world? Smoke signals? $75 isn’t paying for heat and lights AND a phone. Internet is close to that alone. Same with a cellphone.

  • dizzy

    OMG! The budget above does not even come close to “typical” everyday living. What about health insurance, life insurance, homeowners/renter’s insurance, HOA expenses? Utilities at $150 for a typical home? Gas or oil is 2X per month than $150 not including electric (I live in the Northeast) — $150 doesn’t even cover this let alone basic cable & telephone!!! Nice bottle of wine of dinner? It would be nice to go out to eat to a nice place w/my hubby once in a while — we did not purchase a house on 2 salaries;we only used his salary as a guide but even though we are both working, we have childcare costs, the cost of gas to-from work PLUS tolls and things for the 1 child which are REQUIRED school costs — OMG; NOT EVEN CLOSE!!!

  • john hinge

    Very out of touch article

  • Kurt

    I know this will sound extreme but I have been thinking about this myself for a while. Not so much about percentages but living lean. I have read some great articles just by googling living on 1,000 a mo. People could buy a trailer on wheels for 10,000 and own it. Pay some retiree 250 to 300 mo to park it in their driveway or backyard, in a safe desirable area. If you depreciate the trailer over 5 years it would be half the cost of rent. Smaller place equals smaller utilites. Share the internet with your landlord. Most people can’t afford a car, when the total expense is calculated it can cost .50 to 1.00 a mile. Live close to work, get a bus pass or take the subway. Buy a bicycle or walk. Buy everything second hand that has sales tax use ebay or thrift stores and save 70-80 percent. Get a Costco membership and sample food and beverages for free. Treat yourself once and a while to some free samples of the good stuff at Whole Foods. If there is a great movie out, wait 3 months till it is at redbox and rent it for 1.30, even better if you can watch it with a friend, then its only .65 each. Save your money, so if you ever want to buy something, pay for it in cash.

  • Kurt

    Consider leaving the U.S. and live even cheaper. Do your research, lots of ex pats living in Mexico, Panama City, Medellin, Chiang Mai.

  • Account Name Here

    Forgot to mention 10% tithe. 10/40/20/30

  • Mr Archie Bunker

    GET THE BOOK. THE SECRETS OF THE MILLIONAIRE MIND, HARV EKER.

    IT WILL CHANGE YOUR $$$ BLUEPRINT.

    WITHOUT CHANGING YOUR INNER THOUGHTS , YOU CANT CHANGE YOUR OUTER RESULTS.

    YOUR INNER THOUGHTS( SUB CONCIOUS MIND) CHANGES YOUR OUTER WORLD.

    IT WORKED FOR ME :)

  • Jim B in Boise

    What no 10% for tithing? I find that paying an honest tithe to my church helps me live within the 90% that is left much better. It helps in keeping desires in check, knowing that God is on my side in my financial battles, and it brings increased spirituality that helps limit desires, appetites, and passions for consumer itch items. Put God first and all else will fall into place, ignore God and you will be ruled by consumerism.

  • Suzanne Elizabeth

    #s allocated in the article are so inaccurate compared to the actual cost of where I live

  • unskinator

    These calculations are made by someone who has money to spare. Some of these writers need to get living pay check to the next. They have no glue what living hard life is all about. For someone making 36000 per year and not counting in living expenses and croceries etc its just off the wall.

  • ew0054

    It takes discipline. One needs to be willing to change the lifestyle to fit the budget. If you can only spend $500 in a category, too many people justify spending $520 “just this once” with credit cards and get into trouble. I’ve been there, too. It’s a hard habit to break, but once I stopped blaming the economy, my boss, than bankers, el Presidente and everyone else for my financial problems, life got a whole lot better.

  • seans

    135$ including phone and internet? How is that even remotely close to anyone’s utilities? My internet and phone alone are over 150$. Sure I could dial (hehe) back my phone to roughly 40$ and my internet to maybe 50$, which leaves 45$ for water, trash, gas and electric?? LOL

  • lito zerimar

    Your a genius but what about your food?

  • mwall

    What a joke. Food and Gas are flexible expenses? Netflix is Fixed cost?

  • Tim_Sims

    As some one who lives near Chicago, I’m curious how “Molly” manages to rent for only $775 per month within driving range of the city. I guess she has roommates, because nothing else makes much sense.

  • RC

    these financial planners are living in dreamland. The % they give for “taxes and 401k contribution” will be lucky if it covers income taxexs (state, federal, and auto tax). Be real

  • RC

    and they totally left out health insurance, which costs much

  • Kyle

    To all the people who felt the need to complain:

    There is no blanket budget for everyone. This is a general budget scheme for those who can’t seem to figure it out and need basic introduction. Yes, people encounter many problems, and therefore this plan simply may not apply to them very well. If you have been following it, it may have helped you address the problems you encountered to some extent. It may have fallen far short, depending on the situation. I doubt the author intended to solve every single person’s budgetary problems in a few paragraphs using a very basic budgeting system. She specifically mentions that it is very flexible given the situation.

    So please, before nitpicking whether or not health insurance is a tax, or berating her for not using your gas mileage in an example, simply use your brain. Understand that this is meant as a tool for you to develop your own budget, not for her to solve all of your problems using some “secret budget to cure all debts”. This site is designed to help you create a personal budget. Personal. Meaning individual. Meaning designed to accommodate your own goals and expenses. If you really need help, then instead of turning to the comment board full of people looking to whine about their lives, try taking advantage of their free consultation. Maybe they can shed some light, maybe they can’t, but at least you would be taking some sort of action other than making a useless, well, more detrimental than useless, comment about nothing in particular.

  • Mr.MoneyBags

    Answer.. Make more money. Problems solved.

  • Mr.MoneyBags

    Also these Tax rates are rediculously low.. 25%? 30%? try more like 37-40% including 401k +Tax. Unless they are only saving 2% in 401k..

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  • Liz Norris

    find budget not to real

  • Wizbang_FL

    This program would only work if you haven’t already established things like car payments, mortgages, and assume that you have smooth sailing for the past 15 years. However, most people end up needing learn how to go thru a “life change” an a website / investment program won’t change established habits. Many of the numbers assume the individuals found those rates for utilities, costs for food, etc. Which I can get. But the lack of any form of identified protection (insurance) life, health, home/renters ins. Particularly homeowners insurance is a substantial amount for many. It may be a good idea. But looking at the website it has all the indications of a startup doing a fly-by.