50/30/20 Budget Rule: What It Is and Tips on Using It

The 50/30/20 budget rule (aka the 50 30 20 rule) is a simple budgeting technique that involves dividing your money into three basic buckets. It can be an effective way to manage your earnings, allocating 50% of your take-home income to “musts,” 30% to “wants,” and 20% to saving for your future.

For anyone who has ever felt that budgeting was too complicated and headache-triggering to take on, this guideline can make things clear and straightforward.

What Is the 50/30/20 Rule?

The 50/30/20 budget or “rule” is a budgeting framework that can be relatively straightforward to create and implement. It’s one potential way to help keep your finances on track and help you work toward your goals.

The 50/30/20 numbers refer to percentages of your take-home income that you would allocate to three main categories: ”needs” or “musts” (essentials), “wants” (nonessentials), and saving (financial goals), respectively.

The primary goal of the 50/30/20 rule is to learn to prioritize saving money by making it a key part of your spending plan.

Everyone’s financial needs and goals are different, however. And while these percentages can be a great starting point, you may find that you need to tweak these exact numbers to better suit your needs and current financial situation.

Where Did the 50/30/20 Rule Come From?

The 50/30/20 budget rule gained popularity when Sen. Elizabeth Warren explained it in her book, All Your Worth: The Ultimate Lifetime Money Plan, which was first published in 2005.

The simplicity of the concept (and the math) contributed to its appeal. The idea of dividing your money into three instantly understandable buckets proved to have staying power.

How the 50/30/20 Rule Works

In the 50/30/20 budget, you allocate your take-home (or after-tax) income into three main categories or buckets according to percentages.

Recommended: Check out the 50/30/20 calculator to see a breakdown of your money.

50% to ‘Needs’

These are things you cannot live without and the bills you cannot avoid paying. Consider them the “musts”: the items that you need to survive or that would leave you in a difficult situation if you didn’t purchase them.

Here are some examples of typical needs:

•   Rent or one of the different kinds of mortgage payments that are possible (in a nutshell, your housing costs)

•   Utilities, including electricity, wifi, and water

•   Car payments and/or other transportation expenses (say, to get to work)

•   Groceries (but not that pricey takeout salad)

•   Basic clothing (what you need to wear in daily life, at work, and/or to stay warm, not the latest style of jeans just because they’re cool)

•   Insurance payments

•   Health care costs

•   Debt payments, such as the minimums on student loans and/or your credit card

The “needs” category does not include items that are extras, such as Netflix, dining out, and clothing beyond what you need for work. Those fall under the next category.

30% to ‘Wants’

Also known as personal, discretionary, or nonessential spending, these are the things you buy that you could technically live without. This includes:

•   Dining out or takeout food

•   Going to the movies, a show, or a concert

•   Taking vacations or paying for travel

•   Subscribing to streaming channels (unless they are somehow vital for your work)

•   Buying new clothes simply because you feel like buying them

•   Buying electronics that are cool but not vital to your job

•   Getting spa treatments

•   Taking Ubers or taxis instead of public transportation

Wants are all the little extras and upgrades you spend money on that make life more fun.

20% to Savings

This is the money you save for future financial goals. This category often provides a means to financial stability. This includes:

•   Putting money into an emergency fund

•   Saving for a down payment on a home

•   Making individual retirement account (IRA) or other retirement contributions

•   Making extra payments to help pay off your loans sooner (minimum payments are part of the “needs” category)

Even though the budget is written as 50/30/20, the purpose of this system is to prioritize the saving aspect, this 20%. (It may be more appropriately named the 20/50/30 budget.) The goal here is to get people to save for tomorrow rather than just spend today.

The idea is to make space for the 20% without laboring over the rest. The minutiae of where your fun money is going ($5 for a latte here, $10 for an appetizer there) isn’t super important if you’re saving enough to meet your financial goals.

Another point to note: If you aren’t saving 20% of your income right now, that’s okay. The process of setting up the 50/30/20 budget will help you find out where your money is going so that you can make adjustments. After completing your budget breakdown, you can address the areas where you’d like to cut back.

Benefits of the 50/30/20 Budget

The 50/30/20 rule may be a minimalist budget, but it can pack the same powerful benefits you would get with a more labor-intensive budget.

Some of the payoffs of setting up and following a 50/30/20 include:

•   Knowing where you stand: As a popular adage goes, “what gets measured gets improved.” It can be hard to start spending less and saving more if you aren’t clear on how much and where you are currently spending.

•   Identifying ways to cut back: As with any budgeting process, the 50/30/20 budget can reveal opportunities to cut back on spending. Simply going through the process and seeing exactly where your money is going each month can help to motivate you to make some relatively pain-free adjustments.

•   Reducing financial stress: While building a budget may seem like a stress-inducing exercise, it can ultimately relieve a lot of financial worry. It can add structure and clarity to your spending. Instead of angsting over every purchase, you’ll have built-in boundaries that allow you to spend freely within your budget.

•   Simplifying the budgeting process: By having fewer categories than a traditional monthly budget, the 50/30/20 rule of thumb can be straightforward to set up and to maintain. It can also be simple to track a 50/30/20 budget digitally.

•   Achieving your savings goals: By making saving a priority and setting some money aside before you start spending, a 50/30/20 budget can help you work effectively toward your financial goals. Whether that’s creating an emergency fund, making a down payment on a home, or going on a great vacation is your decision.

Tips for Implementing the 50/30/20 Budget

Want to give the 50/30/20 budget a try? If you decide to go this route, or you’re just looking for some budgeting basics, here are some steps you can take to get started.

Gathering Your Financial Records

To get started with any kind of budget, it’s helpful to collect the last several months of bank and credit card statements, pay stubs, receipts, and bills.

Calculating Your Monthly Income

You can use your statements to figure out exactly how much money you are bringing in each month after taxes are taken out. You can think of after-tax dollars as the pot of money you have to siphon into the three budget categories each month.

Setting a Savings Target

You may want to begin with the more important category, which is the 20% (savings). Since the goal for this budget is to turn the 20% into a nonnegotiable part of the plan, you’d calculate 20% of your monthly after-tax income and set that figure aside for things such as debt repayment, cash savings, retirement investing, and any other financial goals that you have.

Even if you don’t feel it’s realistic for you to put 20% into saving right now, you might run the exercise assuming that you will. You’ll be able to tinker with the numbers later.

Calculating Essential Monthly Expenses

Next, you may want to make a list of all of your monthly essential or fixed expenses, such as rent/mortgage, utilities, groceries, and insurance.

Currently, do essential items absorb more than 50% of your take-home income each month? If so, what percentage do they comprise? And is there any way to reduce any of these monthly expenses?

Building a Hypothetical Budget

After adding up savings and essentials, what is left over is what can be allocated toward discretionary spending, or the “wants” outlined above.

It can be helpful to keep in mind that the 50/30/20 numbers are just a guideline. If the cost of living is high where you live, for example, it may not be feasible to keep essentials to 50% of your take-home income. In this case, you may need to reduce spending on wants.

Or you may decide that at this point you can’t quite afford to put 20% into savings. There are variations on the 50/30/20 theme that accommodate these situations, such as the 70/20/10 rule, which acknowledges that for some people, a hefty 70% will be needed for the “musts” of life.

Recommended: Cost of Living by State Comparison

Once you see your numbers in black and white, you can play with the percentages and come up with a workable plan for roughly how much you can spend on nonessentials, or fun, each month.

Putting Your Plan Into Action

Now that you have a basic guideline of how much money you will put into one type of savings account each month and how much cash you can spend each month on wants, it’s time to give your budget a try.

You may want to plan on tracking your spending for two to three months to start. You can do this by saving receipts and logging expenses according to the three categories at the end of the day. Or you could use a budgeting app that makes it convenient to track and categorize expenses.

Another tip: Try automating your finances and having money transferred from your checking account to your savings right after payday. That way, you won’t see the cash sitting in your checking account and think it’s there for the spending.

Making Some Tweaks

After tracking your spending for several months, you’ll probably have enough data to refine your original 50/30/20 budget. From there, you can adjust the categories based on your actual spending, not just your projected spending.

You may also find that you need to adjust your spending. Discretionary spending is typically the easiest place to do some trimming.

You may decide you need to cook at home (rather than get takeout) a few more times a week, save on streaming services by dropping a channel you rarely watch, or ditch the gym membership and work out at home.

It may also be possible to pare back some of your fixed monthly expenses. Reducing utility bills, saving on gas, and, if possible, lowering your rent could free up more money for fun spending. You may also want to look into whether you are paying bank fees. Switching to an online bank or other financial institution with low or no fees could free up a bit more money in your budget.

After making some adjustments, you can execute your new and improved budget. You may want to continue to track spending in a method that works for you until spending according to your budget becomes second nature.

Recommended: How to Make Money From Home

The Takeaway

The 50/30/20 rule of thumb is a set of straightforward guidelines for how to plan your budget. Using them, you allocate your monthly after-tax income to the three categories: 50% to “needs,” 30% to “wants,” and 20% to saving for your financial goals.

Your percentages may need to be adjusted based on your personal circumstances and goals. But using this simple formula can be a good way to get a better handle on your finances and to start working more effectively toward your goals.

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FAQ

Is the 50/30/20 rule a realistic goal?

For many people, the 50/30/20 rule is a realistic way to budget for essentials, discretionary expenses, and savings contributions. For others, it may not be realistic. If you are just starting your work life, earn a lower salary, live in an area where housing is very expensive, or have considerable debt to manage, you might do better with a different budget guideline.

Is the 50/30/20 rule weekly or monthly?

When budgeting, people typically work with their monthly expenses since that is how housing costs, utilities, and other payments (say, student loans and credit card debt) are assessed. You could, however, apply the 50/30/20 guideline to your weekly spending and see how your finances are tracking.

What is the 60/30/10 rule budget?

The 60/30/10 budget is a different version of the 50/30/20 rule that can work well for those with higher costs of living. It allocates 60% more for the “musts” of life and 30% for discretionary spending. The remaining 10% is for saving and paying off debt.

What is the 70/20/10 rule for money?

The 70/20/10 rule is a budgeting system. It allocates 70% of one’s take-home income toward “needs” (minus debt) and “wants” (discretionary spending), 20% to saving and investing, and 10% toward debt repayment or donations.

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