If you struggle to maintain a consistent household budget, consider a simple formula — the 50/20/30 rule for tracking your expenses. Really more of a guideline than anything, the 50/20/30 rule divides up your spending into three categories to keep you on budget: needs, wants, and savings. To give you an idea of how it works, let’s take a look at how a median income household in the U.S. might use the rule to create a budget.
How a 50/20/30 budget works
As with other budget rules — like the less formal 50/15/5 rule — the goal is to help you track your spending so you develop sustainable spending habits and avoid relying on high-interest debt. Here’s how it breaks down:
- 50% of your monthly spending goes toward needs. Needs are essential expenses that you must pay in order to survive or keep working. This can include rent, transportation, utilities, and food.
- 20% of your monthly spending goes toward savings goals. This category can also include debt payments, since you need to pay those off.
- 30% of your monthly spending goes towards stuff you want. That might include your gym membership, travel, gifts, and dining.
What a 50/20/30 budget would look like in practice
Using the U.S. median household wage of $US63,179 (A$84,274) as our starting point, we’ll need to deduct taxes. Obviously state taxes will differ, but for this example, I’ll use the estimated taxes for New York state, which leaves us with $US46,271 (A$61,721) in take-home pay. That in turn, leads to this monthly breakdown:
- 50% on needs = $US1928 (A$2,572)/month
- 20% on savings = $US771 (A$1,028)/month
- 30% on wants = $US1157 (A$1,543)/month
Considering that an average two-bedroom monthly rental can cost between $US800 (A$1,067)-$US1800 (A$2,401) depending on which state you live in, your accommodation will have the greatest impact on whether you stay on budget, along with how much debt you carry. (To see how a 50/20/30 budget would work for your income, check out this calculator).
Again, these are guidelines. If you live in New York City or San Francisco, you might end up spending less on wants and more on rent so that the ratio is closer to 65% needs, 20% savings and 15% wants — whatever works best for your situation. As part of this process, however, you can identify excess costs and hopefully eliminate them (e.g., the gym pass you aren’t using, or a subscription TV service you can cancel) to keep your spending within your budget guidelines.
As with all budget rules, the goal is to maintain a consistent budget that keeps debt payments manageable, while also putting some money aside for retirement. If you’re struggling to pay off your debts, read more here about your debt repayment options.