Budgeting for Beginners – the 50/20/30 Rule

Have you ever looked at your finances and wondered, “where does it all go?” If so, you’re not alone – 59% of Americans don’t use a budget, and even fewer of them have $1,000 in the bank. I believe that most people are well-intentioned when it comes to money management, and they just fall short on execution. If you’re the type who keeps a budget, but you only keep track of it in your head, you’re not doing much better. Mental accounting is unreliable at worst, and full of rationalizations at best. For this reason, getting your expenses on paper (or virtual paper) is vitally important.

A budget is telling your money where to go instead of wondering where it went.- Dave Ramsey

Getting started with a budget can be intimidating. I’m going to recommend the 50/20/30 Rule for this very reason – it’s sometimes referred to as the beginner’s budget, or the minimalist budget. It’s a budgeting strategy that is very approachable for those new to budgeting, or for those who feel they don’t have a handle on their expenses. At the very least, it will help you map out your expenses and your income so that you can answer the question of “where does it all go?”

Budgeting For Beginners – the 50/20/30 Rule

To start with, I’ve created a free worksheet which you can either download or access via Google Sheets. Use this worksheet to follow along with the steps below

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Get the 50/20/30 Worksheet, and follow along with me in my step-by-step guide to create a beginner budget.
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1. Determine Your Income

The first step in getting started is to determine your income from your pay stubs. No matter how you get paid, take a look at your recent pay stubs and jot down the following three figures: your net income (the amount of your check, or take-home pay), any deductions for health insurance premiums, and any contributions towards retirement/savings plan (like your 401k) for an entire month. The sum of these three totals will become your total monthly allowance (entered in Cell B2 if you’re using the worksheet).

If you don’t have this information readily available – relax! Accuracy is important but what’s even more important is getting started, period. Estimate to the best of your ability, and remember that budgeting isn’t a one-time event. Periodic reviews and adjustments to your budget are essential to sticking with it over time.

2. Record Past Spending Habits

If you use a tool which automatically tracks your spending by category, or record your expenses yourself, now’s the time to take a look at your recent spending habits. These are generally going to be either fixed, variable, or occasional expenditures. A fixed expenditure is a specific dollar amount paid reliably every month for the same amount. Things like car insurance, student loan payments, and mortgage payments would be considered a fixed expense. A variable expenditure will be higher or lower every month, based on various factors. Electricity and gas bills vary month-to-month in most instances, along with things like personal spending. Finally, an occasional expenditure is one that you only pay every so often. Your Amazon Prime membership, car insurance if paid in full, and medical expenses would all fall under occasional expenditures.

Periodic reviews and adjustments to your budget are essential to sticking with it over time.

I recommend looking at least three months back for variable expenditures, and averaging out your totals for each spending category. For example, my August electricity bill was abnormally high (thanks, Texas summer!), but my October one was low. I took the average of all three monthly bills to get a rough monthly estimate.

Finally, you won’t want to forget about those things you pay every once in a while, like annual veterinary visits, car repairs, or rental insurance. To calculate the monthly cost of these occasional expenses, take the total amount of the expense divided by the frequency – 6 for every six months, 12 for every twelve months, etc. So, if my car insurance premium was due every six months at a premium of $400, I would put down $66.80 as my monthly cost for this expense (as 400 divided by 6 = 66.8).

3. Set Your Goals

In this example, I’m going to be using the 50/20/30 Rule, a ratio originally written in Elizabeth Warren’s book “All Your Worth: The Ultimate Lifetime Money Plan.” For now, fill in all of your known expenses – the items you recorded in step two. Don’t worry yet about the unknowns.

The 50/20/30 rule is not going to look that way for everyone. Think of it as a target. You want to aim for no greater than 50% on core living essentials, no less than 20% on financial security, and no more than 30% on discretionary spending. In addition, there are going to be some grey areas for a few categories – do you consider internet and TV a necessity, or a luxury? Many would argue it’s a luxury, however some will consider it a necessity if their work depends on it. You will have to make this call and adjust as necessary for your own situation.

50% of Your Budget – Essentials

The first category claiming 50% of your monthly budget should be your essential living expenses and obligations. These are costs that will always take priority, the “must-haves.” Your rent or mortgage, healthcare costs, utilities, food, transportation, and minimum debt payments all belong under this category. Obligations are any sort of minimum payment you are contractually required to pay. Student loans, and some phone bills would fall under this area, as well as your credit card minimum payment.

essential living expenses budget

20% of Your Budget – Financial Security

The next 20% of your monthly allowance should be allocated towards securing your financial future and paying down debts. Again, your minimum debt payments should not be included in this category. Your retirement contributions, savings and emergency/rainy day fund also fall under this category. To plan for your future, it is recommended that you put at least 20% of your budget here.

savings and debt budget

30% of Your Budget – Discretionary

The final 30% of your budget is for all other non-essential spending. These are your subscriptions, your luxuries, vices, and anything else that you don’t “need”. This category should be no more than 30%. You should only fill out this category with leftover budget dollars if the other two categories are satisfactory.

expense breakdown for personal spending

4. Account For Reality

The simple fact is that the 50/20/30 rule isn’t going to be perfect for everyone. You may have special circumstances that throw your spending out of whack in some categories. It’s possible that you live in a major city where rent alone is 1/3 of your paycheck. Perhaps someone in your household has a medical condition to care for. Maybe you’re debt-free and nearing retirement age and 20% savings is overkill. There are plenty of reasons why your version of the 50/20/30 rule will look different, and that’s okay. The important thing about getting started with a budget is setting good habits for the future, and that you have a clear picture of where your money is going each month.

What if you have a lot of debt?

A possible variant is the 50/30/20 rule, which nudges the financial category higher at the expense of discretionary. Consider adopting this if you carry high debt, low personal expenses and want to aggressively pay it down faster. My first recommendation here is that you should always be saving, even if you have debt. There’s a reason why you hear so much about the power of compound interest. The sooner you start saving money, the faster it will begin working for you. It will eventually eclipse and surpass the interest paid on your debt.

After your minimum debt obligations, invest no less than 10% into savings, and 20% into an emergency fund. Do this until you have three months of essential expenses (the 50% category, not your entire budget) saved. After you’ve reached this milestone, shift that 20% into extra debt payments. Whether you use the  “snowball” or “avalanche” method is going to depend on many factors, so you can read more about that here.

5. Adjust As Needed

A budget is not a “set it and forget it” tool, especially when you’re just starting out. After you set your spending goals, monitor your spending over the next few months to see how you are doing. If you aren’t using a budget-tracking tool, I highly recommend You Need A Budget or Mint. If you’re okay with tracking expenses manually, a simple spreadsheet will suffice.

Tracking expenses in this fashion will shine a light on things you don’t realize you’re doing.

You may find that you’ve over or underestimated some of your budget categories over time, where you wouldn’t notice month-to-month their true cost. A perfect example of this was when I was calculating how much we were spending on our animals. I grossly underestimated the cost of veterinary checkups, flea/tick and heartworm medication, until it all became due in the same month. Talk about sticker shock!

Expenses are also going to change over time, whether that’s due to increases in income (yay) or increases in certain expenses (boo). You may also decide to shift your priorities – for example, saving up for a down payment for a house while cutting back on some discretionary spending. If you don’t adjust your budget to account for these changes, you end up losing track and veering off course.

Know Your Money

Tracking expenses in this fashion will shine a light on things you don’t realize you’re doing. A few years back, I used to have a Starbucks addiction and treated myself to a latte here and there. I realized I was spending almost $80 a month on these temporary luxuries that weren’t even that important to me. When I thought about the money in that way, it became hard for me to justify them. If I had $80 on hand right now and was looking to spend it somewhere, lattes wouldn’t make the list.

Beware of little expenses: a small leak can sink a great ship. – Benjamin Franklin

While following a budget does require some discipline, the payoff cannot be overstated. You’ll have a stronger handle on your finances, know where your dollars are going each month, and not get caught flatfooted when those once-a-year expenses come around (holiday gifts, anyone?). Most importantly, you’ll establish a secure financial future for yourself by giving savings and debt reduction a healthy portion of your budget.

Have any questions or feedback? Let us know in the comments and we’ll try to help. Try our 50/20/30 Worksheet and let us know how it worked out for you.

Free Download
Get the 50/20/30 Worksheet
Get the 50/20/30 Worksheet, and follow along with me in my step-by-step guide to create a beginner budget.
Go to Google Sheet      Download for Excel