50/30/20 rule

UPDATED: February 07, 2023

If you're looking to create a budget, you might hear some people swear by the 50/30/20 rule. But what is it?

The 50/30/20 rule is a budgeting guideline that suggests allocating your after-tax income towards three categories:

  1. 50% goes to towards essential costs to maintain your basic quality of life (a.k.a “needs”). These includes things like rent or mortgage payments, groceries, utilities, and health insurance. It also covers debt payments on things like student loans or credit card debt.
  2. 30% towards discretionary spending (a.k.a “wants”). These are things that you don't necessarily need to survive but can still bring you joy and satisfaction. Examples of wants include dining out, entertainment, vacations, and new clothes.
  3. 20% towards savings. This is for saving towards short-term and long-term goals such as an emergency fund, retirement, or a down payment on a house. Debt payments above the minimum amount can also be used from this category.

It was first proposed by Senator Elizabeth Warren and her daughter, Amelia Warren Tyagi in their book, All Your Worth: The Ultimate Lifetime Money Plan.

The budgeting system has since become a favorite with personal finance experts, as it allows you to live within your means while also having money for things you enjoy.

How to budget your money with the 50/30/20 rule

There is very little upfront work with the 50/30/20 rule. Most of the work is in sticking to your budget month to month. But don't worry, we have some tips that'll make things easier.

Step 1. Calculate your after-tax income

Start by calculating your after-tax income, which is the amount of money you have left over after taxes are taken out of your paycheck. This is the amount that you will use to create your budget.

Let's say your after-tax income is $3,000 per month. Let's see how that'll break down:

Step 2: Allocate 50% of your money to needs

You'll set aside 50% x $3,000 = $1,500 for your needs. You can set up a separate account for this and automatically transfer $1,500 into this account every month. This account will contain only the money for essentials such as groceries and rent.

At this point, you should list the essential expenses that you incur every month. If you can, set up automatic payments from your needs account to these expenses when they are due.

Remember, if your needs make up more than 50% of your income, you'll have to lower your allocations to wants and savings to have enough for your needs.

Step 3: Allocate 30% of your money on wants

Next, set aside 30% x $3,000 = $900 for your wants. Again, set up a separate account and transfer $900 into this account automatically each month.

Step 4: Allocate 20% of your money for savings

The last 20% x $3,000 = $600 of your income should be allocated towards savings. This includes both short-term and long-term goals such as an emergency fund, retirement, or a down payment on a house. It is important to save for the future so that you can have financial security and peace of mind.

Debt repayments should can come in here too. However, consider only debt payments above the minimum payment required (if you make extra payments on a credit card debt to pay it off faster, for instance).

On the other hand, the amount of the minimum payment would instead count toward the 50% needs category.

Step 5: Track if you're sticking to your budget

If you're using separate accounts for each of your expense categories and have automatic payments coming out of them, then most of the work is done – you'll know that you're spending within your budget.

However, not all payments can be made automatic. So it's still important to review on a monthly basis if you're sticking to your budget and not overspending in any one category. You can track your spending by creating a budget spreadsheet or using a budgeting app.

Examples of budgeting apps to track your spending include Mint or YNAB (You Need A Budget).

We really like using a budgeting app because most of them connect to your bank accounts, which makes tracking finances a lot easier and we're all about automating your finances.

Is the 50/30/20 budget rule right for you?

The 50/30/20 budget rule is an easy-to-follow system that's great if you're new to budgeting. It's also good if you're someone who likes to keep things simple. For example, you won't need to calculate your monthly expenses with this system, which can take a lot of time.

On the other hand, the 50/30/20 rule may not be realistic if you're on a low income or living in high cost of living areas.

For those with lower incomes, it may be difficult to allocate 20% of their income towards savings and still have enough left over to cover their needs. Similarly, those living in areas with higher costs of living may need to adjust the percentages accordingly in order to make ends meet.

Here's an example to make things clearer:

Let's say Jack earns $2,000 per month and lives in an area with high costs of living. In this situation, he needs $1,500 or 75% of their income to pay for needs such as rent, utilities, and groceries. That's way more than the suggested 50%!

If he were to insist on allocating 30% to wants and 20% to needs, he won't have enough for his needs. In order to make ends meet, he must adjust the percentages so he will have more money for needs.

What if I need more than these predetermined percentages?

Let's say you're like Jack and need more than 50% of your income to pay for your needs, what should you do? This is very common as everyone's financial situation is different. Luckily you have a few options.

Option 1: Change the allocations to suit your circumstances

Remember that the 50/30/20 rule is a guideline, not a hard and fast rule.

You can still consider your individual circumstances when deciding how much to allocate to each category. Ultimately, it is up to you to decide what works best for your financial situation.

For example, if you have high student loan payments or other debt obligations, you may need to allocate more than 50% of your income towards needs and less towards wants and savings.

Option 2: Cut back on expenses in that category

Now might be a good chance to cut back on expenses. If your needs are more than 50% of your income, ask yourself if you're paying too much on essentials.

Perhaps there are better deals on utilities. You could switch to a cheaper energy provider or opt for a cheaper phone plan.

Option 3: Ensure the expense is in the right category

Create a list of all the expenses in your needs category. Really scrutinize if they are needs. Sometimes, things that you thought were needs are actually wants. 

So how do you tell if a “need” is actually a “want”?

Sometimes it can be hard to tell. For example, if your roof is leaking – is this a need or a want?

Here are some questions to ask yourself:

  • Is this necessary for your survival? Survival means that you can continue to eat, sleep and earn money. If not having something will prevent you from having that, then it's a need. 
  • Is it a one-off expense? Wants are usually one-off expenses – think vacations, or a new gadget. Needs are usually recurring – think groceries, utilities etc. 
  • Can I delay having this thing? You usually can delay wants – you can live with the wet patch on your ceiling for another month. Whereas you must have food every day. 

Your answer to these questions will tell you if you should be reassigning some stuff from the needs category to the wants account.

Which category takes priority? 

Your needs category should take the top priority. Do not allocate less than what you need here! 

Savings should be the second priority, as that will ensure your long-term financial health. 

The lowest priority are your wants. While you shouldn't put off enjoyment for too long, being able to delay getting what you want can help put you on a better financial footing. 

How does the 50/30/20 rule compare to other budgeting methods?

The 50/30/20 rule is pretty similar to other budgeting methods, especially if you're tweaking the allocations based on your actual expenses. 

This is because most budgeting systems require you to come up with allocations to different spending categories based on your current expenses. 

The only difference here is that the guidelines of how much to allocate is given to your at the outset. If you choose to follow the guidelines wholesale then it is a lot simpler to get compared to other budgets.

Conclusion: You need a budget, whether you follow the 50/30/20 rule or not

The 50/30/20 budget rule is a great way to manage your finances and can be beneficial for those who are just starting out with saving.

It provides a simple and straightforward way to allocate your income into different categories, allowing you to prioritize needs while still having enough left over for wants and savings.

Even if you find that the allocations aren't entirely suitable, you will still make great strides towards financial success if you follow the principles of the 50/30/20 rule, as there is a lot of overlap with other budgeting methods.