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There’s a lot to consider when you’re wondering how to divide your income.
The simplest and most direct way to divide your income is using a budget spreadsheet and a simple budget rule like the 50/30/20 budget template. I’ve found that budgeting is easier to do when there are rules and guidelines. Otherwise budgeting feels abstract and confusing, and can get overwhelming real fast.
The best budgeting method for beginners is the 50/30/20 budget rule. It divides your income into three categories – 50% is for NEEDS, 30% for WANTS, and 20% for SAVINGS and DEBT.
There are a few reasons I think the 50/30/20 budget template is great for anyone looking to start a budget.
- 50/30/20 budget has simple rules to follow (more on that below)
- It helps divide your income into simple budget categories
- It’s flexible and forgiving
- Organizes your finances in a logical way
- Best for beginner budgeters who just need a simple budget to get started
And I made a simple budget spreadsheet for $5 that’s already formatted as a 50/30/20 budget. Grab your budget spreadsheet here and get started today.
After we dive into the 50/30/20 budget rule, I’m going to give you two more budget rules that might fit your unique financial situation a little better. It’s always good to have options.
But before I talk about either of those things, here are 4 questions I’d consider when choosing how to divide your income.
Things to Consider When Dividing Your Income
When I think of dividing my income into categories like needs, wants, and savings, there are a few questions that pop into my head.
- What are your overall goals and priorities for your budget?
- What are your NEEDS?
- How much money do you want to save?
- What specific goals are you saving for?
How you answer these questions will help you determine the best way for you to divide your income.
What are Your Goals and Priorities for Your Budget?
Goals, values, and priorities are the cornerstone of every budget. And it’s what makes every budget unique.
The things that matter to me – having a big emergency fund, paying cash for vehicles, always having money to travel, and slowly adding value to our house – might not matter at all to you.
But I’ve learned that when you set goals that you care about, you give yourself a reason to use your budget every month. Your budget will then help you prioritize your goals and values and make sure you’re spending money on what matters.
As a result, you’ll also spend less money on crap you don’t care about.
So, as you’re deciding how to divide your income in your 50/30/20 budget template, take time to assess what your goals and priorities are. It will make a big difference.
What are Your Needs?
When I think of needs, the first thing that comes to mind is basic needs for survival – food and shelter.
When you’re making your 50/30/20 budget and dividing your income, I’d prioritize these budget categories in your needs section:
- Mortgage/rent
- Groceries
- Gas for my car
- All utility bills for my house – electric, gas, internet, garbage
- Minimum debt payments
- Household supplies – toilet paper, soap, laundry, etc
- Daycare
- Insurance
- Dog Food
- Tithe/Giving
Of course your list of needs might look different because every budget reflects a unique set of family circumstances. Maybe you don’t have pets or kids. No problem, then you have less NEEDs in your budget.
Whatever your needs are, make sure they only take up 50% of your budget when you divide your income.
How Much Money Do You Want to Save?
Saving money is one of the hardest things to do if you don’t have a budget. It’s also something that almost EVERYONE is trying to do more of.
The 50/30/20 budget rule alots 20% of your net income for saving AND debt. You can divide that up however you want, but it guarantees you’re dedicating some money to your savings account every month.
If you make $3,000 a month, the 50/30/20 budget rule gives you $600 a month for savings and debt. If you split it right down the middle, that’s $300 going to your savings account monthly.
Is that enough? Would you like to save more?
Only you can answer that question for your family.
The good news is every budget is adaptable, so if you want to save 30% of your income, you can totally do that. You just need to adjust your other budget categories to make it happen. And if you use a debt snowball spreadsheet to become debt free, you’ll have even more money to save!
We’ve done it with our budget, and I’ve seen a lot of others do it too.
Knowing how much money to save is good, but an even better question is…
What are You Saving Money For?
This question strikes at the heart of budgeting. All good budgets are focused on goals, and most of those goals are about saving money for things you really care about.
Off the top of your head, if you could save an extra $300 a month, what would you save for? Here are a few ideas off the top of my head.
- Vacations and travel
- New house
- Emergency fund
- New car
- Wedding
- Fancy jewelry
- Expensive camera
- Wedding anniversary trip
- Starting a family
There are so many things you could save money for. You just need to decide what’s important to you and start transferring money to savings. And when you use the 50/30/20 budget rule to divide your income, you’re guaranteed to save at least SOME money.
What is the 50/30/20 Budget Rule?
The 50/30/20 budget is a rule to help you set up your budget and it’s GREAT for beginner budgeters!
So, what are the rules for setting up a 50/30/20 budget template?
You break your take home pay down into percentages for your different types of expenses.
- 50% of your income is for NEEDS
- 30% of your income is for WANTS
- 20% of your income is for SAVINGS and DEBT PAYOFF
All of your expenses and savings can be separated into one of those categories.
An Example of the 50/30/20 Budget Rule in Action
Let’s say your monthly income and take home pay is $4,500.
Now you need to separate your income into wants, needs, and savings.
- 50% needs is $2,250
- 30% wants is $1,350
- 20% savings and debt is $900
Now every single thing you spend money on should fit into one of these three categories when you set up your 50/30/20 budget as a zero based budgeting template.
Which means, at the end of the month, your income – expenses/savings = ZERO.
And if you don’t want to do all the work of making your own budget, I’ll happily make a budget for you.
30% of Net Income is for Wants
We’ve already touched on an example budget and examples of needs in your 50/30/20 budget, so now it’s time to talk about what fits into the ‘wants’ category.
A big part of determining your wants is making sure they all fit within 30% of your net income.
For example, my wife is a wanter. She actually wrote an entire blog post for me on how to budget when you want to buy everything. But we don’t buy everything we want, not even close. Instead, we make intentional choices about how much to spend on our wants based on our big goals and priorities I mentioned earlier.
Let’s look at some examples of wants:
- Dining out
- Extra streaming services
- Gym membership
- Personal allowance (this is close to a need in our family)
- Drinks or food with friends
- Hobbies
This is obviously a very small list and there’s no way for me to possibly list everything a person could want. But it’s a place to start and get your creative juices flowing.
And if your wants are GREATER than 30% of your net income or take home pay, you’ll need to cut out a few expenses and your wants are probably the best place to start.
The good news is, as you pay off debt or increase your income, you can always add a few wants back into your budget.
If there are things you spend money on that aren’t a NEED, write them down under the WANTS section of your 50/30/20 budget template.
20% of Income to Savings and Debt
Here are things to keep in mind for your 20% savings and debt section of your 50/30/20 budget. These three bullet points are all a form of savings or debt repayments.
- Sinking fund savings goals – vacations, new house, emergency fund, car, holidays, etc
- After tax retirement contributions like Roth IRA
- Extra debt payments (recommended if you’re using a debt snowball spreadsheet)
Side note – a sinking fund is a strategy to save money. If you have a big savings goal, like going on a two week trip to Ireland, you will transfer money into your savings account every month. Over time, your savings will grow through your monthly contributions. This is how a sinking fund works. 🙂
I’m a huge fan of paying off debt ASAP so this entire 20% can go toward more fun things like sinking funds and retirement. One of the tools that really helped us save more money and track our savings goals is this Sinking Fund Tracker I made. It keeps track of all of our savings goals in one simple spreadsheet.
More Budgeting Rules to Help Divide Your Income
Budgeting isn’t a one size fits all deal, which is why there isn’t just one budget rule that works for every single family to divide their income.
The 50/30/20 budget is probably the simplest and most common, which makes it perfect for anyone getting started. But I also recommend checking out a couple other budgeting rules I’ve reviewed and analyzed.
The 30/30/30/10 Budget Rule
Similar to the 50/30/20 budget rule, the 30-30-30-10 budget rule splits your expenses into FOUR categories, each with a specific percentage “bucket”.
- 30% for housing (rent/mortgage, transportation, appliances, etc)
- 30% for all other expenses
- 30% for financial goals (savings, debt, retirement, investing)
- 10% for fun money and entertainment
I really like recommending the 30/30/30/10 budget rule for dividing your income if you really want to focus on reaching your financial goals.
Plus I like that it prioritizes fun money. We all need that and it helps your budget feel less restrictive.
The 70/20/10 Budget Rule
The 70 20 10 budget rule splits your monthly income into three buckets to make budgeting simple. Here’s the breakdown of your budget percentages in a 70 20 10 budget:
- 70% for living expenses
- 20% for savings and investments
- 10% for giving and debt
I’ve seen it broken down a few different ways. 70% is ALWAYS for living expenses. But the 20% can focus on ONLY savings, both savings and retirement, or soley on debt if you have a lot of high interest debt.
The same goes for the 10% bucket. I’ve seen examples of the 70 20 10 budget that gives 10% fully to debt, 10% for giving, or a combination of debt and giving.
Conclusion
If you’re ready for a simple way to divide your income, the 50/30/20 budget template is a great place to start. You can buy a cheap $5 budget that is already organized into needs, wants, and savings/debt.
Plus it will calculate your total income and expenses for you. All you need to do is enter your expenses into the budget spreadsheet.
Be sure to check out a more in depth look at the 50/30/20 budget template, and if you want my $5 budget spreadsheet, you can grab it here.
Our budget and goals changed our lives and it can change yours too.
