How to Make a Budget: The 50-20-30 Approach

“Budget” is a simple little word, but it can strike fear in almost anyone. It brings to mind complicated spreadsheets, mind-numbing math and—perhaps most irritating of all—lots of seemingly random spending restrictions.

Wait, though. When it’s done in a balanced way, budget planning can be quite freeing and can lower your stress level about money. A balanced monthly budget can do more than just help you get by. It can help you save money toward other exciting things, like vacations, holiday gifts and the big one—college tuition.

Better yet, a balanced budget is pretty easy to create.

The 50/20/30 budgeting strategy¹

With this minimalist guide on how to make a budget, just split your monthly income into 3 simple buckets, or budget percentages:

• 50% for Needs
• 20% for Savings
• 30% for Wants

This balanced way of budgeting, often referred to as the “50/20/30” approach, was popularized by Harvard bankruptcy expert and now-Senator Elizabeth Warren (D-Massachusetts) and her daughter, Amelia Warren Tyagi. Many financial experts—and lots of “regular people”—now use this method. Here’s how it works:

1. First, determine your monthly income

This is the money you have available to spend, after taxes. In addition to that net monthly paycheck, income includes any money from other sources:

• Money earned from a side job
• Alimony and/or child support
• Investment income
• Government benefits

Add up all of the money sources. This is your monthly income.

2. Figure out a 50% “Needs” target

This Needs budget bucket includes required monthly expenses:

• Rent or mortgage
• Utilities (water, garbage, electricity, gas, phone)
• Insurance (including home/renters, car and health)
• Food (groceries only; eating out goes into the “Wants” category)
• Transportation (including commuter passes, tolls and gas)
• Clothing

Calculate 50% Needs 

Multiply your monthly income by 0.50. For example, if your after-tax income is $3,000, your Needs budget is $1,500.

Monthly income ($3,000) x 0.50 (50%) = $1,500 (target Needs budget)

A good goal, then, would be to spend no more than $1,500 per month, or 50% of your available monthly budget, on required expenses.

Spending more than 50% on Needs? Consider trimming some fixed costs. Why? Putting too much money into your Needs category could mean you run short of money for Savings and Wants. Get ideas for cutting costs on food, utilities, insurance or commuting.²

3. Determine your 20% “Savings” amount

Savings are an important part of any balanced monthly budget. Having money in savings means you’re less likely to go into debt to afford a big-ticket item or pay for an unforeseen expense.

Keep in mind that debt payments (other than a mortgage) are also included in the 20% savings percentage. Why? Simplicity. After paying off student loans, credit cards or car loans, you can redirect that same money into a savings account.

Here’s what’s included in the Savings budget bucket:

• Emergency fund
• Retirement savings and investments
• Credit cards, student loans and other non-mortgage debt payments
• Other savings goals (vacation, wedding, home improvements)

Calculate 20% Savings If your monthly, after-tax income is $3,000, your Savings budget is $600.

Monthly income ($3,000) x 0.20 (20%) = $600 (target Savings budget)

Putting less than 20% into Savings? Free up more money by trimming expenses in the Needs and Wants buckets. Get tips on saving money fast and building an emergency fund. Consider putting Savings money in an easy-access savings account.

4. Figure out your 30% “Wants” target

Is it OK to budget for fun stuff? Absolutely! Leaving a little room in the family budget for enjoyable things can keep everyone from feeling deprived.

The Wants budget bucket includes expenses for all the “extras”:

• Restaurant food, from eating out to getting coffee from the corner café
• Entertainment, like downloading movies and music
• Exercise, such as gym memberships or yoga classes
• After-school activities for kids, including travel sports
   

Calculate 30% Wants Using an after-tax income of $3,000, your Wants budget is $900.

Monthly income ($3,000) x 0.30 (30%) = $900 (target Wants budget)

Spending more than 30% on Wants? It’s the same drill: Look for creative ways to cut costs. And if you spend less than 30% on Wants, go back and make sure the Needs and Savings buckets aren’t too big. Don’t shortchange yourself here. Putting money toward some Wants may make it easier to resist “budget fatigue” and make you less likely to throw away the monthly budget altogether.

5. Add it up: 50 + 20 + 30 = 100% balanced family budget

That’s it! This is the simple formula for how to make a budget you can live with.

Of course, this isn’t the only way to create a family budget. However, the main advantage of the 50/20/30 approach is that it’s clear and straightforward. It might even convince the most stubborn anti-budgeters to give it a try. When that happens, “budget” can stop being a dirty word and start being one of your family’s most helpful everyday resources.³