The 50-30-20 Rule and Other Budgeting Methods

If you’re looking to start budgeting, there are several different approaches you could take depending on your goal. Creating and sticking to a budget can seem challenging at first, especially if you’re starting from scratch.

It may take some trial and error before finding one that works for you, but we’re confident there’s a budgeting method out there for everyone. A key to success is to set realistic goals and be flexible.

Here are three popular options to consider.

The 50/30/20 rule is arguably one of the best-known budgeting methods due to its simplicity. It uses a percentage-based approach to setting up your monthly spending budget. The rule recommends that you put 50% of your net income (or take-home pay) towards essentials, 30% towards wants, and 20% towards savings.

Essentials include any living expenses that are a necessity for your day-to-day life. For example, this may include your mortgage or rent payment, groceries, utilities, insurance, and debt payments.

Your wants are things you’d like to have to improve your quality of life but aren’t necessary for survival. Examples of wants include dining out, subscriptions, memberships, or other entertainment options. If you’re looking to reduce your spending, this is the category you’ll usually look at first for expenses you could cut back on or eliminate.

Savings is the money you set aside for short-term or long-term financial goals (e.g., an emergency fund, retirement, or a down payment).

The 50/30/20 budgeting method is popular for a couple of reasons. First, the preset spending categories and percentages are simple enough for most people to implement – even if this is your first time working with a budget.

Second, it can be a great way to help you visualize and balance your spending and savings priorities. With a dedicated category for savings, the 50/30/20 rule provides an important reminder to save consistently for your future.

One potential drawback of this budgeting method, however, is that the preset percentages may not work for everyone – especially for individuals who live in an area with a higher cost of living. For instance, you may find yourself having to spend more on housing or transportation, pushing you over the 50% threshold for essentials. This is when you may have to adjust the percentages slightly for your circumstances and lifestyle.

Good to know: If you’re creating a budget or trying out a budgeting method for the first time, you may have to test and adjust your numbers a bit to find the right balance.

Reverse budgeting flips the traditional budgeting approach on its head. Instead of allocating money towards your spending categories – covering your needs and wants first – you put the focus on saving.

In other words, you’re paying yourself first before paying any other bills. That’s why reverse budgeting is also sometimes referred to as the “pay yourself first” method. You’ll set aside a predetermined percentage of your take-home pay and put the money into a savings account.

After you’ve paid yourself, you’ll pay your essential bills. Whatever is left over is yours to spend however you like – this is your discretionary income.

An upside to reverse budgeting is that it’s fairly low maintenance since you’re not tracking every dollar you spend or categorizing your expenses. But how much should you set aside for savings? That’s entirely up to you.

For example, you could keep things simple and stick to the recommended 20% under the 50/30/20 rule. Or perhaps you want to save a little more for a specific goal you have in mind. Whatever percentage you choose, you can adjust that over time as needed.

Good to know: To help make sure you’re actually saving the amount you’re budgeting for, consider automating your savings. Many traditional and online banks offer an automatic deposits or transfers feature, allowing you to schedule recurring transfers from your checking account to your savings account. This can be a great way to build your savings without having to remember to do it each month.

This method aims to balance your budget in such a way so that every dollar of your monthly net income is accounted for, assigned, and spent. In other words, your total net income equals your total expenses, leaving you with a balance of zero at the end of the month.

To be sure, this doesn’t mean to spend every dollar you bring in. Rather, it simply means that each dollar is meticulously tracked. Similar to the budgeting approaches we covered above, savings should still be a part of your zero-based budgeting plan.

Here are the basic steps of getting started with this method.

1. Figure out your monthly net income (e.g., take-home pay).
2. Identify and list all your monthly expenses, including your savings.
3. Categorize those expenses, so you can set a target budget for each.
4. Subtract your total expenses and savings from your net income.

If you’ve carefully accounted for every dollar, you should’ve zeroed out your budget. In other words, you end with a balance of zero. If you end up with a positive number, however, it means you have money left over. You can allocate the extra dollars towards a savings goal or choose to spend it however you want.

If you see a negative number, it means your expenses are greater than your income. This is when you’ll want to look at your non-essential expenses and see what you could cut back on or eliminate in order to balance your budget (when income equals expenses).

Zero-based budget does tend to take more time to put together (compared to the previous methods we covered). This approach may also be tougher for individuals whose income and expenses vary greatly from month to month.

But one potential benefit of this budgeting method is that it can help you plan and visualize your spending in detail. Because every dollar is tracked, you’ll have a better understanding of how you spend (and save) each month. This level of detail can be helpful when you need to reallocate dollars or make any other adjustments to your budget. 

Whichever budgeting method you end up using, try to stick to it consistently.

If you find yourself overspending every now and then, don’t be too hard on yourself. Review your spending and see what adjustments you need to make. A budget is not meant to be static – it should naturally evolve over time as your life changes.

Bottom line: The key to successful budgeting is to set goals, be realistic, be flexible, and find an approach that works for you (and one that you can commit to!).