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 their tracked expenses that their essential expenses like rent, utilities, groceries, transportation, and student loan payments add up to approximately $1,750 per month. They allocate exactly 50% of income, which is $1,750, to cover these needs. They then allocate $1,050 to discretionary items and $700 each month to retirement and savings. They set up an automatic transfer from their checking account to their savings account to occur on each payday.
Bo is promoted six months later. Their income has changed so they reevaluate each budget amount, review their overall budget, and make adjustments as necessary. They also realize that their transportation expenses are higher than expected so they decide to begin carpooling with a colleague to reduce costs.
Bo remains disciplined and consistent with their budgeting practice. They prioritize financial well-being and regularly evaluate their progress toward their goals. They continue to adjust their budget to reflect changes in their income and priorities as they progress in their career. They’ve taken steps to not only meet their current needs but to have sufficient funds available for their future as well.
How to Adopt the 50-30-20 Budget Rule
No single way of tracking a budget will work for everyone but these high-level tips on adopting a 50-30-20 budget are relevant to nearly all individuals.
Track Your Expenses
Keep track of your expenses for a month or two to better understand your spending habits. Analyze your spending to determine how well or poorly it already adheres to the 50-30-20 breakdown by classifying what you spend into needs, wants, and savings. This will set the groundwork for a better understanding of how far off from budget you’ll be when you start.
The only way you’ll know if you’re being successful at adhering to this budget is by tracking your actual spending. This can be done fairly easily using spreadsheet solutions such as Microsoft Excel.
Understand Your Income
The beginning of the 50-30-20 budget is rooted in having a firm grasp of what your income is. Keep in mind that your gross income may be very different from your net income. Gross income is the amount before federal and state income taxes are withheld. It’s not what you can take home and spend.
Understanding what you earn and what hits your bank account each pay period will put you in a better position to establish the correct budget amounts for the three categories.
Identify Your Critical Costs
Critical costs include expenses such as rent or mortgage payments, utilities, groceries, transportation expenses, insurance premiums, and debt repayments. These costs are necessary for your daily living. They may take up the largest portion of your budget so it’s important to be most mindful with this group. And they must be incurred so you probably have the least amount of flexibility with them after you’ve committed to them.
Automate Your Savings
Saving will be simpler if you automate the process. Set up monthly automatic payments from your checking account to your investment or savings accounts. This guarantees that your funds will increase steadily without requiring manual labor. You may find it easier to regularly review your budget to make sure it’s in line with your lifestyle and financial objectives if you’re carrying a lighter burden of administratively managing your savings.
Maintain Consistency
Adopting the 50-30-20 budget successfully will require maintaining consistency. Stick to your spending strategy over time and resist the desire to go over budget or depart from your percentage allocations. This spending plan is often most successful when you have clear guidelines that can be leveraged every month. Be mindful to reset your spending limits each month and strive to maintain consistency from one period to the next.
The Bottom Line
Saving is difficult and life often throws unexpected expenses at us. The 50-30-20 rule provides individuals with a plan for how to manage their after-tax income. They can find ways to reduce expenses and direct funds to more important areas such as emergency money and retirement if they find that their expenditures on wants are more than 30%.
Life should be enjoyed and living like a Spartan isn’t recommended but having a plan and sticking to it will allow you to cover your expenses and save for retirement while enjoying the activities that make you happy.
Key Takeaways
Frequently Doubted Questions
Yes, you can modify the percentages in the 50-30-20 rule based on your circumstances and priorities. Adjusting the percentages can help you tailor the rule to better suit your financial goals and needs. This is especially relevant for people who live in areas with a high cost of living or those who have higher long-term retirement saving goals.
Taxes are typically excluded from the calculation of the 50%, 30%, 20% rule because the rule focuses on allocating income after taxes. You should consider your after-tax income when applying the rule. Be mindful to use gross income and appropriately forecast what your taxes will be if you do decide to factor in taxes.
Track your expenses, prioritize essential needs, be mindful of wants, and consistently allocate savings or debt repayment within the designated percentage to budget effectively using the 50%, 30%, 20% rule.
Yes, the 50-30-20 rule can be used to save for long-term goals. Allocate a portion of the 20% to savings or the 30% for wants specifically to your long-term goals. These might include a down payment on a house, education funds, or investments. The rule is meant to bring focus to savings.
