Why I Use the 50/30/20 Formula

The 50/30/20 rule is a simple and easy way to plan your finances and control your spending. brightpeak financial breaks it down in four easy steps.


When my wife and I got married, we decided to combine our finances. We knew we needed a budget to help keep our costs under control, so we went with the old reliable Excel spreadsheet! 

We listed out all of our budget items for our home, utilities, household items, charitable donations, etc. We thought we had the whole “money” thing figured out.

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However, at that time we didn’t know that there are different strategies for paying bills. Strategies that allow you to build confidence in your finances – no matter how much you make.

One of these strategies, is the 50/30/20 formula. Harvard bankruptcy expert Elizabeth Warren, named one of the 100 Most Influential People in the World by TIME magazine, and her daughter Amelia Warren Tyagi, coined the 50/30/20 rule of thumb in the book they co-authored, “All Your Worth: The Ultimate Lifetime Money Plan.”

When I learned about the 50/30/20 formula, I realized that the budget my wife and I created was out of proportion. I also learned ways to fix it.

If you’re wondering how to find out if you’re balanced financially, let’s get started!  First thing you need to do, if you haven’t already, is create a spreadsheet that lists all of the things that you spend money on. Be honest! Don’t forget the Netflix subscription or other items that come automatically out of your checking account. The more complete your spending list is, the better your results will be. This list will help you discover if you’re out of balance.

Next, you’re going to create a NEW budget. This one will be balanced, with 50% of your after-tax income going to needs, 30% going to wants, and 20% going to savings and/or debt repayment. Want a quick start, with a pre-filled template that has formulas already calculated for you? Download our 50/30/20 calculator here.

Step one: Calculate Your After-Tax Income

Your after-tax income is the amount you collect after taxes are taken out of your paycheck, such as federal and state tax. If you don’t have a steady paycheck, take the last 3 months and average them to get your after-tax income.

If health care, retirement contributions, life insurance, disability income insurance or any other deductions are taken out of your paycheck, add them back in to your total monthly income.

Step Two: Limit Your Needs to 50 Percent

What’s a need and what’s a want? That’s the million-dollar question. Any payment that you can eliminate with only minor inconvenience, like your cable bill, is a want.

Any payment that would severely impact your quality of life, such as electricity, is a need. If you can’t miss a payment, such as a minimum charge on a credit card, it is also considered a “need.” Why? Because your credit score will be negatively impacted.

Review your budget. Note how much you spend on “needs” such as groceries, housing, utilities, health insurance and car insurance. The amount that you spend should be no more than 50 percent of your total after-tax pay.

Step Three: Limit Your Wants to 30 Percent

On the surface, Step Three sounds great. Thirty percent of my money can be put towards my wants? Hello, golf club membership, trip to Greece, salon haircuts and Italian restaurants.

Wait! Not so fast.

Remember how strict we were with the definition of a “need?” Your “wants” include your unlimited text messaging plan and your home’s cable bill.

Anything beyond that – such as shopping for designer clothes rather than going to the discount outlet – qualifies as a want.

Step Four: Spend at Least 20 Percent on Savings and Debt Repayment

Spend at least 20 percent of your after-tax income repaying debts and saving money in your emergency fund and your retirement accounts. If you carry a credit card balance, the minimum payment is a “need.”

Anything above the minimum is an additional debt repayment, which qualifies towards the 20 percent savings target. If you carry a mortgage or a car loan, the minimum payment is a “need” and any extra payments count toward your “savings and debt repayment.”

Now that we are armed with the 50/30/20 program, we can give ourselves permission to have fun, knowing that we are balanced in our approach. Are we completely balanced? No. But we continue to work toward this goal and you can too.

Want to spend less on your wants and needs so you can repay your debt faster? Check out our Hack Your Debt Challenge!