50/30/20 Budget Rule Explained: 101 Guide

what is 50 30 20 budget rule - 101 guide for 50/30/20 Budget Rule
50/30/20 Budget Rule Explained: 101 Guide

No matter where you are in your financial journey, a budget, such as the 50/30/20 rule, is key to ensuring you’re set up for success. A budget can help you rebuild your savings or hack away high-interest credit card debt.

If you’re new to budgeting, figuring out how to manage your money can feel overwhelming. Not only do you need to organize your income and expenses, but you also have to make difficult decisions about how to spend your cash. An excellent way to keep it simple is to consider using a percentage-based budget like the 50/30/20 rule. The idea is to divide your income into three categories, spending 50% on needs, 30% on wants, and 20% on savings.

Learn more about the 50/30/20 budget rule and if it’s right for you.

What is the 50/30/20 Budget Rule?

The 50/30/20 budget rule is a simple guideline for managing your finances. It suggests allocating 50% of your after-tax income to needs, 30% to wants, and 20% to savings.

However, budgeting plans come in various forms with varying levels of complexity, whether you’re budgeting for irregular income or following a spending plan that prioritizes saving. But one simple budgeting method, the 50/30/20 rule (sometimes also written as the 50/20/30 rule), can be a great strategy if you need help starting a budget or you’re getting back on track after a setback.

50/30/20 Rule Breakdown

The 50/30/20 rule is a widely used budgeting approach that divides your monthly income into three main categories. Here’s how it works:

Monthly after-tax income: This is the amount you earn after taxes have been taken out. It’s important to note that additional deductions like health insurance or 401(k) contributions should not be subtracted from your gross income. If you included them with your taxes, make sure to separate them and deduct only the taxes from your gross income.

50-30-20 budget rule pie chart
50-30-20 Budget Rule Pie Chart

Budget 50% for Necessities (Needs)

Needs are the essential expenses that you must pay for and are necessary for your survival. These expenses include:

  • Rent or mortgage payments
  • Car payments
  • Groceries
  • Insurance (such as auto insurance and health insurance)
  • Health care expenses
  • Minimum debt payments (credit card payments, student loans)
  • Utilities (electricity, water, gas)

Allocating half of your after-tax income should cover these needs and obligations. Find yourself spending more than that on needs. It may be necessary to cut down on wants or consider downsizing your lifestyle, such as opting for a smaller home or a more modest car. 

You could also explore cost-saving measures like carpooling or using public transportation. Cooking meals at home more frequently can also help reduce expenses. It’s important to remember that as you pay off some of these expenses, you can adjust your budget to allocate more towards wants or savings.

Budget 30% for Wants

Wants are the things you spend money on that are not essential for your basic needs. They are optional expenses that add enjoyment and entertainment to your life.

Distinguishing between needs and wants can be challenging and may vary from one budget to another. Generally, wants are extras that are not essential for living and working. They are often for fun and may include:

  • New unnecessary clothes or accessories like handbags or jewelry
  • Tickets to sporting events
  • Vacations or non-essential travel
  • The latest electronic gadgets (especially upgrades over fully functional previous models)
  • Ultra-high-speed internet beyond your streaming needs
  • Monthly subscriptions (Entertainment)
  • Dining out

Wants should account for 30% of your income. It’s essential to consider ways to avoid overspending in this category. For example, you can have lunch instead of dinner when prices are lower or cook meals at home. If you enjoy activities like Pilates, exploring lower-priced options such as home workouts through apps can be beneficial. 

However, remember that there is no judgment about your individual wants. Be cautious when it comes to “upgrades.” While we all desire better experiences, upgrading phone plans, vacation packages, or even your wardrobe can significantly impact your savings. For special events, consider rental services that allow you to borrow clothing at a fraction of the cost of buying new items.

Budget 20% for Savings

Allocate 20% of your income towards saving money. Saving can be challenging, especially when prices are rising. That’s where the 50/30/20 Budget Rule can help. By being more aware of your spending, you can find opportunities to cut expenses and save more. Saving falls into different categories, such as:

  • Opening a deposit account for goals like a down payment or vacation.
  • Contributing to investment accounts or retirement plans like a 401(k) or IRA.
  • Building an emergency fund as a buffer for unexpected expenses such as medical bills, car repairs, or job loss.
  • Setting aside funds for long-term property investments
  • Making extra debt repayments beyond the minimum payments.

You can use online or mobile apps with “round-up” programs to take an extra step towards saving. These apps round your debit card transactions to the nearest dollar and transfer the spare change to your savings. You can also set up direct deposit so that a portion of your paycheck goes directly into your savings account.

Ideally, aim to save 20% of your net income. It’s advisable to have at least three months’ worth of emergency savings in case of job loss or unforeseen events.

History of 50/30/20 Budget Rule

The 50/30/20 budget rule gained popularity through its inclusion in the book “All Your Worth: The Ultimate Lifetime Money Plan,” co-authored by U.S. Senator Elizabeth Warren and her daughter, Amelia Warren Tyagi. 

This budgeting method has become widely recognized and accepted since its publication in 2006.

Why is the 50/30/20 Rule Easy to Follow? (benefits)

The beauty of the 50/30/20 rule lies in its simplicity and structure. This budgeting method provides several potential benefits that can guide individuals toward financial prosperity:

  • Ease of Use: The 50/30/20 rule offers a straightforward framework for budgeting, making it easy to understand and apply. You can allocate your income without complex calculations, allowing anyone with limited financial knowledge to follow these guidelines.
  • Financial Balance: Using a budget, you can manage your money in a balanced way. You ensure that your essential expenses are covered, have funds for discretionary spending, and actively save for the future. This approach allows you to save for immediate and future needs while enjoying financial freedom.
  • Priority on Vital Expenses: Prioritizing your fundamental needs is crucial to staying within your budget and avoiding excessive debt. With the 50/30/20 rule’s emphasis on allocating half of your budget to needs, you increase the likelihood of meeting your essential expenses.
  • Emphasis on Saving Goals: By allocating 20% of your income to savings, you can establish an emergency fund, prepare for retirement, pay off debt, invest, or pursue other financial goals. Consistently saving this amount helps you develop sound financial habits and build a safety net for unexpected expenses or future aspirations.
  • Long-Term Financial Security: You prioritize your financial future by setting aside 20% of your income according to these rules. This commitment to savings allows you to accumulate wealth, achieve long-term financial objectives, and provide security for yourself and your family as retirement approaches.

Is the 50/30/20 Budget Rule Right for You?

The 50/30/20 rule is a useful budgeting method, but its effectiveness depends on your unique monthly expenses. Your income and where you live determine if allocating 50% of your income toward needs is realistic. If you live in a high-cost area, staying within the 50% limit may be challenging, especially if housing takes up a significant portion of your income. In such cases, you can adjust the percentages to fit your situation.

Tracking expenses in three categories helps prevent overwhelming details. However, some people may find that the lack of detailed tracking makes it harder to identify areas for improvement in their spending habits. Remember to be kind to yourself during this process. If you don’t meet the exact numbers of the budget rule, things can change in the future. For example, once you’ve paid off your student loans, you can allocate more of your monthly budget to savings.

Where the 50/30/20 Rule Doesn’t Work

The Fifty Thirty Twenty project, created by a graphic designer for the government, shows how challenging it can be to follow the 50/30/20 rule with different incomes and household sizes.

The project uses income data from the 2014 American Community Survey conducted by the Census and estimates of take-home pay from ADP’s salary paycheck calculator. Keep in mind that the costs shown in the project may be even higher for families due to inflation.

For example, the website presents a case of a single adult male living in Chicago with an annual income of $35,637. After taxes, he takes home $2,253 per month.

where 50 30 20 budget rule fail example data and charts from Fifty Thirty Twenty project
Where the 50/30/20 Rule Doesn’t Work – Example by fiftythirtytwenty.com

Strictly following the 50/30/20 rule would be nearly impossible for him because his housing, utilities, and healthcare costs exceed 50% of his take-home pay.

Ultimately, it’s your decision to choose the budgeting system that works best for you based on your habits and circumstances.

Example of the 50/30/20 Budget Rule

Let’s say your monthly after-tax income is $3,000. According to the rule, you would allocate your income into three categories as follows:

Needs (50%): $1,500

  • Rent or mortgage payments: $800
  • Utilities: $150
  • Groceries: $200
  • Insurance and healthcare: $150
  • Minimum debt payments: $200

Wants (30%): $900

  • Dining out: $200
  • Entertainment: $100
  • Shopping: $300
  • Hobbies: $100
  • Travel: $200

Savings (20%): $600

  • Emergency fund: $200
  • Retirement savings: $200
  • Other savings goals: $200

By following this breakdown, you ensure that you cover your essential needs, have room for discretionary spending on wants, and allocate a portion of your income toward savings for future goals and financial security.

Remember, these percentages can be adjusted based on your circumstances and priorities. Still, the 50/30/20 rule provides a general guideline for managing your income effectively.

The 50/30/20 Rule vs. Other Budgeting Methods

There are alternative budgeting methods you can consider if the 50/30/20 rule doesn’t suit your needs. Here are a couple of examples:

  • The 80/20 Rule: Allocate 20% of your income directly to savings, while the remaining 80% is available for your discretionary spending without tracking every expense.
  • The 70/20/10 Rule: Divide your budget differently by assigning 70% to cover living expenses, 20% towards paying off debts, and 10% towards savings.


In conclusion, the 50/30/20 rule is a valuable budgeting tool that can set you up for financial success. By dividing your income into three categories – 50% for needs, 30% for wants, and 20% for savings, you can ensure a balanced approach to managing your money. It provides a clear framework that is easy to understand and implement, making it suitable for individuals starting their financial journey or recovering from setbacks.

While the 50/30/20 rule may not be a perfect fit for everyone, it offers several benefits. It helps prioritize essential expenses, encourages savings for emergencies and future goals, and promotes financial balance. Remember, you can adapt the rule to your unique circumstances and adjust the percentages as needed. Ultimately, the goal is to establish healthy financial habits and working towards a secure financial future.

Frequently Asked Questions and Answers (FAQs)

Should I Include Taxes in the Calculation of the 50/30/20 Rule?

When using the 50/30/20 rule, excluding taxes from the calculation is generally recommended. The rule focuses on allocating income after taxes have been deducted. However, if you include taxes, use your gross income and accurately estimate your tax obligations.

Can I Use the 50/30/20 Rule to Save for Long-Term Goals?

Absolutely! The 50/30/20 rule can be a helpful tool for saving for long-term goals. Within the 20% allocated for savings, you can set aside a portion specifically for your long-term objectives, like saving for a down payment on a house, funding education expenses, or investing for the future. The rule emphasizes the importance of savings, allowing you to prioritize and work towards your long-term financial aspirations.

Can I Modify the Percentages in the 50/30/20 Rule to Fit My Circumstances?

Yes! The beauty of the 50/30/20 rule is its flexibility. You have the freedom to modify the percentages according to your individual circumstances and priorities. Suppose you live in an area with a higher cost of living or have specific long-term retirement saving goals. In that case, you can adjust the percentages accordingly.

Where does Credit Card Debt go in the 50/30/20 Rule?

Paying down debt is a financial goal and an essential aspect of overall financial well-being. In the 50/30/20 rule, you can allocate a portion of the 20% category towards paying down debt, alongside saving for the future.

How Much of Your Paycheck Should You Spend with the 50/30/20 Rule?

The 50/30/20 rule doesn’t prescribe specific amounts to spend or save from each paycheck. Instead, it provides a percentage-based framework for budgeting. The amount you allocate from each paycheck towards spending or saving depends on your financial goals within the 20% category.

Leave a Reply

Your email address will not be published. Required fields are marked *

You May Also Like