FINANCIAL FRESHMAN #043
TL;DR → Following a 50:30:20 budget means that 50% of your spending goes to your needs, 30% goes to things you want, and 20% goes to debts or saving. This can be a valuable framework for curbing lifestyle inflation and holding you accountable to saving, while still allowing you to have some fun with your money.
The 50:30:20 Rule
Regardless of how much money you make, you need a budget to understand where your money goes each month. Admittedly though, budgeting every transaction you make can be fairly cumbersome, especially if you don’t take advantage of a tool like YNAB or Monarch.
What if you aren’t interested in tracking every purchase you make, but still want some inclination as to whether or not you’re “doing well?” This is where the 50:30:20 budget framework comes into play. In this post, we’ll break down the pieces of this framework, explain why it works, and talk through some considerations before using this approach to manage your financial picture.
Breaking Down Each Category
Maybe you already knew this, or perhaps you didn’t. In the 50:30:20 budgeting framework, 50% of your expenses should be for things that you need, 30% should be for things that you want, and the remaining 20% should be for things that directly increase your net worth, either via saving or paying off debt.
For a recent graduate that takes home $4,200 on a monthly basis, this chart below outlines exactly what those bounds would look like.
Especially when you itemize all of your expenses, it can get ambiguous as to what belongs in each category. Let’s talk through some examples!
Needs: This may go without saying, but these are the expenses that you need to survive. Your rent goes here, as well as the weekly grocery trip, and the gas for the car you take to get there. Your utilities will go here too—the water bill, electric bill, and a natural gas bill if you’ve got it. In 2025, we can also safely call internet a need.
Wants: Saving for a vacation? Have a monthly Netflix subscription? Ordering Taco Bell off Uber Eats at 11PM? These are wants, and I don’t think I have to convince you why you don’t need these things to survive.
Net Worth: This section takes on a few different names, depending on what corner of the internet you look. I like calling it “Net Worth,” because all money spent here should be directly increasing your net worth. Are you paying off a credit card $200 at a time? Do you have a minimum monthly payment for your car? Do you save $300/month to an IRA? Those are the items that should fall in this category.
What About the Weird Stuff?
With an approach this high-level, there’s going to be some expenses where categorizing them may be a bit ambiguous. I’ve rapid-fired through several below, along with my opinion on where they should go. Obviously, YMMV.
- Amazon Purchases – You’ll have to break these down a little bit further. Paper towels for the apartment are a need, board games are obviously not.
- Gym Membership – Hmm, a tough one. I would call this a need just to reward the healthy lifestyle choice, unless it’s some bougie $300/month gym that you go to because you like their saunas. We both know you don’t need that.
- Work Clothes – It can be a slippery slope to quickly dismiss purchases like these as needs, because obviously you need clothes to wear to work! If you’re replacing trashed/donated clothes, call that a need. If you already have a closet full of perfectly good work clothes, than this is a want.
- Parking Fees – What are you parking for? A haircut? Need. A concert? Want. Essentially treat these as being added to the cost of whatever activity you’re doing, if there is one.
- Phone Bill – Not to be difficult, but itemize it. Do you have to pay $40 just to have an active line? That’s a need, but the rest of the bill probably isn’t (especially if your phone is financed).
Any other ambiguous items come to mind that you’d like my opinion on? Shoot me a message here.
Perks of 50:30:20
To me, there’s three main perks associated with using this framework to manage your money. I’ve outlined them in the table below.
For one, obviously using this approach wouldn’t require you to track every single expense in real-time, or pay for some fancy budgeting app. At the end of each month, a quick review of your spending and categorization of each line item is all it would take to figure out where you stand. If you feel comfortable financially and don’t think daily scrutiny of your spending is worth it, this could be ideal for you.
For two, this budgeting framework is very effective at curbing lifestyle inflation. Really granular budgets can feel restrictive, and can easily give you buyer’s remorse when you financially treat yourself. Using this framework strikes a great balance between ensuring you’re living within your means, while still equipping you to enjoy your income.
Lastly, this framework strongly encourages saving or getting out of debt, regardless of how much money you make. Perhaps when you review last month, you see that your car payment plus the amount you saved was only 14% of your income. Next month, you can put that other 6% to work boosting your savings or paying off your car quicker than you planned!
Final Thoughts
Where your ratios are will strongly govern the health of your overall financial picture. Unknowingly being a 50:45:5 spender for years is not a situation you want to find yourself in!
Hopefully this added some clarity on this popular budgeting approach, and the benefits that can come with it. If you don’t have a budget at all today, I encourage you to try this at the end of the month, and see where your spending stands.
