Budget calculator: Calculate your monthly budget using the 50/30/20 rule 

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(NewsNation) — Many Americans struggle to manage their finances, but a monthly budget can be a powerful tool for regaining control.

According to a recent Bankrate survey, a third of Americans have more credit card debt than emergency savings, up from 22% in 2022. Even more, about 60% are uncomfortable with their emergency savings.

The 50/30/20 rule is a good starting point to get control of your finances. It’s a popular budgeting technique that breaks your monthly after-tax income into three spending categories:

  • Needs (50%)
    • Rent or mortgage payments, car payments, groceries, utilities, minimum debt payments
  • Wants (30%)
    • Gym membership, dining out, tickets to sporting events, vacations, clothes
  • Savings (20%)
    • Emergency fund, retirement savings (401(k) or individual retirement account (IRA) contributions), paying off debt beyond the minimum payment

For example: If you make $4,000 per month after taxes, then $2,000 should go toward needs, $1,200 to wants and $800 for savings and paying down debt.

Figure out how your monthly budget breaks down using NewsNation’s 50/30/20 calculator.

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How do you create a 50/30/20 budget?

Step 1: Calculate your monthly take-home pay.

This includes paychecks from your job, money from a side hustle, or retirement checks from Social Security. It’s the total amount you take home each month after taxes are withheld.

Check your pay stub for a specific breakdown of how much you make after taxes. Generally, 401(k) contributions count toward the 20% savings target, so you’ll want to factor that into your monthly income if those funds are automatically withheld from your paycheck.

Step 2: Track your monthly expenses.

Look back at your previous bank statements and figure out where your money is going each month. Place each of your expenses into one of three categories:

  1. Needs: The required expenses you can’t avoid, like housing payments, grocery bills and transportation costs.
  2. Wants: Nonessential expenses like dining out at restaurants, shopping, travel and entertainment.
  3. Savings: Money you are saving for a rainy day, retirement or using to pay down debt.

Step 3: Compare your expenses to your monthly income

After calculating your monthly income and categorizing your expenses, figure out how much you’re spending in each category. With the 50/30/20 approach, you can identify where you’re spending too much or too little.

A free budget worksheet can help you categorize your monthly expenses and track your spending.

Alternative example:

After-tax income: $5,000

  • Needs: $2,500 (50%)
  • Wants: $2,000 (40%)
  • Savings: $500 (10%)

This individual’s essential expenses are right on target, 50%, but their spending on nonessentials is higher than the 50/30/20 strategy recommends. They may want to identify areas they can cut in order to save more each month.

Is the 50/30/20 rule the best budget method?

There is no one-size-fits-all approach when it comes to budgeting. The 50/30/20 rule is popular because it’s straightforward, but that doesn’t mean it’s realistic for everyone. It’s important to factor in your age, debt, and financial goals when determining how much to spend and save each month.

Other budgeting techniques to consider:

  • Zero-based budgeting: Every single dollar of your income is assigned to a specific purpose until your balance reaches zero.
    • Can help prevent impulse purchases but is also hard to manage if your income and expenses vary each month.
  • Envelope budget: Allocate your take-home pay toward specific categories by placing them in labeled envelopes (physically or electronically with an app). Once you’ve used the funds in an envelope, you can no longer spend in that budget category for the month.
    • Offers a hands-on way to budget that can limit overspending but can be tedious and hard to manage.
  • Pay yourself first: A reverse budgeting strategy where the first “bill” you pay every month is to your savings account. This prioritizes saving.
    • Lower maintenance than other budgeting strategies, but prioritizing saving may not be the best financial decision for everyone.

 

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