Personal Finance Faiz February 2, 2025 2:13 pm Key Takeaways The 50-30-20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should dedicate 20% to savings, leaving 30% to be spent on things you want but don’t necessarily need. The rule is a template that’s intended to help individuals manage their money. It balances paying for necessities with saving for emergencies and retirement. What Is the 50/30/20 Rule? The 50-30-20 rule involves splitting your after-tax income into three categories of spending: 50% goes to needs, 30% goes to wants, and 20% goes to savings. U.S. Sen. Elizabeth Warren popularized the 50-20-30 budget rule in her book, “All Your Worth: The Ultimate Lifetime Money Plan.”This intuitive and straightforward rule can help you draw up a reasonable budget that you can stick to over time to meet your financial goals. 50%: Needs Needs are the bills that you absolutely must pay and things that are necessary for survival. Half your after-tax income should be all you need to cover those needs and obligations.Consider either cutting down on wants or trying to downsize your lifestyle if you’re spending more than 50% on your needs. This might mean downsizing to a smaller home or a more modest car. Maybe carpooling to work or cooking at home more are solutions. Examples of needs include but aren’t limited to: Rent or mortgage payments Car payments Groceries Insurance and health care Minimum debt payments Utilities 30%: Wants Wants are the things you spend money on that aren’t absolutely essential. You can work out at home instead of going to the gym or watching sports on TV instead of getting tickets to the game. This category also includes those upgrade decisions you make such as choosing a costlier steak instead of a less expensive hamburger, buying a Mercedes instead of a more economical Honda, or choosing between watching television using an antenna for free or spending money to watch cable TV. Wants are all those extras you spend money on that make life more enjoyable and entertaining. Examples of wants include but aren’t limited to: Unnecessary clothing or accessories like handbags or jewelry Tickets to sporting events Vacations or other non-essential travel The latest electronic gadget, especially an upgrade over the fully functioning model you already have Ultra-high-speed internet beyond your streaming needs 20%: Savings Try to allocate 20% of your net income to savings and investments. You should have at least three months of emergency savings on hand in case you lose your job or an unforeseen event occurs.Focus on retirement and meeting more distant financial goals after that. Examples of savings can include: Creating an emergency fund Making IRA contributions to a mutual fund account Setting aside funds to buy physical property for long-term holding Making debt repayments beyond minimum payments FiftyThirtyTwenty.com. “Financial Stability in America.” Importance of Savings Americans are notoriously bad at saving and the U.S. has extremely high levels of debt. The average personal savings rate for individuals in the United States was just 3.4% in June 2024. The 50-30-20 rule is intended to help individuals manage their after-tax income, primarily so they have funds on hand for emergencies and savings for retirement. Every household should prioritize creating an emergency fund in case of job loss, unexpected medical expenses, or any other unforeseen monetary cost. A household should focus first on replenishing their emergency fund if it’s used. Saving for retirement is also a critical step because individuals are living longer. Calculating how much you think you’ll need for retirement at a young age and then working toward that goal can help ensure a comfortable retirement. Benefits of the 50-30-20 Budget Rule The 50-30-20 rule can guide individuals to financial prosperity in several ways. Potential advantages of these guidelines include: Ease of use: The 50-30-20 rule offers a straightforward framework for budgeting. It’s simple to comprehend and apply. You can distribute your income immediately without the need for intricate calculations. Even the least financially savvy individual can adhere to these rules. Better money management: You can manage your money in a balanced way by using a budget. You can ensure that your necessary costs are covered, that you have money for discretionary spending, and that you’re actively saving for the future. You can save for current as well as future needs this way and still have a little fun with your finances. Prioritization of vital expenses: You can make sure you cover your fundamental needs without going over budget or taking on too much debt by giving these basics top priority. These rules stipulate that half of your budget goes towards needs so this plan helps make sure your essentials are more likely to be met. Emphasis on savings goals: You can set up an emergency fund, prepare for retirement, pay off debt, invest, or pursue other financial goals by allocating 20% of your income to savings. You’ll establish sound financial practices and build a safety net for unforeseen costs or future goals by consistently saving this amount. Long-term financial security: You can prioritize your financial future by continuously setting aside 20% of your salary. This expenditure to savings can help you accumulate money, meet long-term financial objectives, and give yourself and your family a sense of security in either the short or long term. Example of the 50-30-20 Budget Rule Let’s say that Bo recently graduated from college and started their first full-time job. They want to develop good financial habits from the beginning and have heard about the 50-30-20 budget rule. They decide to set up a 50-30-20 budget. Bo starts by tracking their expenses for a month using a budgeting app that automatically categorizes their expenses into needs, wants, and savings. They also calculate their monthly after-tax income which amounts to $3,500. This will be their basis for allocating their budget according to the 50-30-20 rule. Bo realizes after analyzing