If you're seeing this message, it means we're having trouble loading external resources on our website.

If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked.

### Course: Financial Literacy>Unit 2

Lesson 1: Budgeting

# How do you build a budget?

building a budget using the 50/30/20 rule income expenses fixed expenses variable expenses wants needs goals

## How do you build a budget?

Simply put, you build your budget by comparing your income against your spending. One way to build a budget is to use the 50/30/20 rule.
Watch Sal build a budget using the 50/30/20 rule:
Budget exampleSee video transcript
The 50/30/20 rule divides your money into three categories: needs, wants, and savings.
The 50/30/20 rule suggests that you spend 50% of your income on your needs, 30% on your wants, and 20% on your savings. This way, you can balance your money and plan for your future.

## How do you use the 50/30/20 rule to build your budget?

To use the 50/30/20 rule to build your budget, you need to follow these steps:

### Step 1: Know your income

Your income is the money you earn or receive every month. It can come from a job, an allowance, a gift, or a scholarship. Add up all your income sources and write down the total amount. If your only income is your job, write down the amount you get paid each month. This is your starting point for your budget.

### Step 2: Calculate your needs budget

Your needs are the things you must have to live and be healthy. Examples include:
• Rent
• Utilities
• Food
• Transportation
• Insurance
• Basic clothing
To find out how much you can spend on your needs, multiply your income by $0.5$.
For example, if your income is $\mathrm{}2,000$, your needs budget is $\mathrm{}2,000×0.5=\mathrm{}1,000$ . This means you should try to keep your needs expenses below $\mathrm{}1,000$ every month.

### Step 3: Calculate your wants budget

Your wants are the things you like to have but don't really need. Examples include:
• Hobbies
• Entertainment
• Eating out
• Shopping
• Travel
To find out how much you can spend on your wants, multiply your income by $0.3$. For example, if your income is $\mathrm{}2,000$ , your wants budget is $\mathrm{}2,000×0.3=\mathrm{}600$. This means you can spend up to $\mathrm{}600$ on your wants every month.

### Step 4: Calculate your savings budget

Your savings are the money you put aside for your future goals. Examples include:
• Emergency fund
• Retirement account
• College fund
• Any other big purchase you are saving for
To find out how much you should save, multiply your income by $0.2$. For example, if your income is $\mathrm{}2,000$, your savings budget is $\mathrm{}2,000×0.2=\mathrm{}400$. This means you should save about $\mathrm{}400$ every month.

### Step 5: Write down your actual spending

Now that we have calculated our budget, let's start sorting our actual spending. Grab your latest bank statement, or log into your banking app, and start sorting your actual expenses. For example, if you see that you made a $\mathrm{}200$ payment towards your electric bill, write $\mathrm{}200$ under the "Needs" budget. If you see a charge for movie tickets, write that amount under "Wants" budget.

Subtract your expenses from your budget. This is your budget balance. If your budget balance is zero or positive, that means you are living within your means and have some extra money. If your budget balance is negative, that means you are spending more than you should and may have a budgeting problem.

If your budget balance is negative in any of the three categories, don't panic! Look at the other categories and see if there is money left in them, and use that extra money to balance or offset the negative balance.
If there is no extra money, you need to find ways to reduce your expenses or increase your income.
If your budget balance is positive, you can decide how to use your extra money. You can spend it on your wants, save it for your goals, or donate it to a cause.

## Want to join the conversation?

• If someone runs a small business as their main income and say they make $2,000 one month,$3,000 the next month, and $400 the third month, how would you calculate your income? (19 votes) • There are a few different ways you could approach budgeting with an inconsistent income like this. Here are three possibilities: 1. You could average your monthly income over a certain period of time to arrive at a monthly figure to budget around. For example, in the three-month example given, your average monthly income would be$1,800. You could budget around this figure, being careful to save extra money in the months where you make more, in order to cover expenses in the months where you make less.
2. You could take the lowest monthly income you tend to receive and use that as your baseline for budgeting. In the example given, you would budget around making \$400 per month. This would be a conservative approach, and you would need to save the extra income in the months where you make more, in order to cover expenses in the leaner months.
3. You could create a flexible budget where your expenses adjust depending on your income each month. This might mean that in months where you make more, you can spend more on discretionary expenses or invest in your business, while in months where you make less, you cut back on these types of expenses in order to make ends meet.
• I'm thirteen but still made a budget just like Saal's.
• You are so wise! One thing I wish I would have done that is so simple: save a percentage of every dollar that comes into your hands. Whether it is the 20% recommended here or just 10%, you will always be very happy you did this.
• Hypothetically, is it okay to swap the wants and savings categories so that I am saving 30% of my monthly income and using 20% for wants?
• No problem. Do that and prosper! Of course, you might find yourself a bit pinched when it comes time to take a vacation to Las Vegas.
• how can i use extra money or spend them?
• You can use extra money to support victims of domestic violence in your community by contributing it to a shelter for abused women and children. You can spend extra money to purchase clean socks and underwear for homeless people.
• The cost of living, especially for young adults are quite high. Additionally, there will be student loans once I get to college. By then, credits and loans and such will be quite high and I don't think I'll be able to follow the 50-30-20 rule. What will I do then?
• Don't pay for college in the first place. Go into business for yourself by auditing classes, learning online, paying SOME money for very TARGETED disciplines that you want to learn.

Everyone seems to have a degree; and you'll just be competing with everyone else who is also hugely in debt.

If you absolutely feel you want to go to college, learn to write, and create small videos on a YouTube channel. Get a bunch of 'friends' on Facebook or other social media platforms, and then ask for donations after going onto an online crowdfunding site.

A quarter from a million people is a quarter million dollars and most won't think twice about that if they feel it's for a really good cause.

Again, this is why I stress teaching yourself sales and marketing.

With that understanding and skillset, the world is pretty much your oyster. Let's stop all this non-sense about solving your problems by scrimping and saving for years on end and going into debt, taking classes you'll never use or want; and rather, learn the art of true investment... such as what I just outlined.

The advice being given is shameful here... it's going to leave most of the people here in financial bondage!

So, let's think of a creative way to get out of this mess!
• I disagree with the 50/30/20 rule, if budgeted you could probably save at least half of your after-tax income. Try and cut out as many need as you can, start with eating out and cook your food at home, and not just opening up a ready-made bowl of mac 'n cheese, actually make something from scratch. Just a suggestion.
• Cooking at home is not the problem for poor people. Things like rent, health insurance and the high cost of keeping an automobile on the road eat up the available funds.

As you work out a budget that fits into your apparent 30/20/50 scheme, how much are you, yourself, paying for rent? How much are you, yourself, laying out for health insurance? What portion of your personal after-tax income is being spent keeping your car on the road? These real expenses will help you see if your scheme is practical.
• If I don't have a need do I put that towards wants or saving?
• Dear Hannan,
I'm going to assume that you still live in your parents' home, where your shelter, food, transportation and entertainment are already taken care of. In a situation like that, saving is just a good thing to learn, but it doesn't really make a difference.

This lesson is about budgeting. Why not do this: Make a game of it. Use "Monopoly money", assign yourself a salary, and some expenses. Use envelopes to divide up the money for "fixed expenses" that happen monthly, quarterly and annually. See how it feels.
• I feel like given how the needs section already feels like the budget is very very spread out with not a lot of wiggle room, cutting back just doesn't feel like the best idea. Yes it would technically go against the 50/30/20 rule, but I feel like cutting back on wants even more may have been a better idea to allow for the savings target. Even if it means having a weird ugly 59/21/20 rule instead. Maybe I'm missing the point but it feels easier to save on stuff like "eating out" (don't get sodas or just go to cheaper restaurants) than your car.
• The first and best thing I can advise is that you dump the car. That was the big money pit into which large chunks of my resources went from the time I was 16 until I was 24. Had I learned to do without that junk, I'd have been thousands of dollars ahead at a young age, and tens of thousands of dollars ahead now that I'm an old guy.

Ditch. The. Car.