50/30/20 Budget Rule

The 50/30/20 rule is an easy budgeting strategy that divides your after-tax income into needs, wants, and savings.

Whether new to budgeting or looking for a simplified way to manage your household finances, this method can help you stay on track, save money, and meet financial goals. Read on to learn how the 50/30/20 budget rule works, how you can use this budget, and the benefits it offers.

What is the 50/30/20 rule?

So, what is the 50/30/20 rule, exactly? It’s a budgeting method that categorizes your household finances into the essentials you need, the things you want, and your savings and debt-reduction goals.

Let’s take a closer look at these categories:

Needs: 50%

Household needs make up the most considerable portion of the 50/30/20 budgeting rule.

Needs are essential purchases necessary to live, and everyone must spend money on these basic expenses regardless of their job, income, family size, or location.

Groceries, transportation costs, housing, healthcare, and utilities are apparent needs. You should also include childcare costs, education costs, minimum debt payments, and insurance in the “needs” category.

Wants: 30%

Under the 50/30/20 budget rule, “wants” account for 30% of your after-tax income. These are things you spend money on that are not essential, meaning you can go without them if money is tight.

Entertainment expenses always fall into the “wants” category. For example, these expenses might include monthly gaming subscriptions, streaming services, concert tickets, phone apps, hobbies, and dining out.

Purchases, such as clothing, electronics, and accessories, are considered “wants” because you can generally get by without them until there’s enough money in your budget.

If you’re having trouble deciding whether an expense is a want or a need when using the 50/30/20 budget, ask yourself if there’s a viable alternative. For example, a gym membership may seem necessary because you exercise for your health. However, this expense is a “want” because you can always work out at home instead of at a gym.

Savings: 20%

Following the 50/30/20 rule, 20% of your income goes to savings. This includes your retirement plan, savings account, and emergency fund.

And even though minimum monthly payments are considered “needs,” debt repayments can be included in the “savings” category.

For example, let’s say your monthly car payment is $400, which you categorize as a “need” for budgeting purposes. However, you’ve been making $600 payments to pay down the balance faster. In this scenario, $200 of that payment should be included in the “savings” category.

How to use the 50/30/20 budget rule

In theory, the 50/30/20 rule is simple, but putting it into practice requires some effort.

Here’s what you need to do to make the 50/30/20 budget rule work for you:

1. Calculate your income

Figure out your total monthly income after taxes. Be sure to count any retirement deposits, as you’ll include these in your savings bucket.

Since it helps to look at specific 50/30/20 rule examples, let’s say you take home $1,500 every two weeks. In addition, you have $200 automatically deposited into your 401(k) each month. This brings your monthly total to $3,200.

2. Take a look at your recent spending habits

Understanding your current spending habits can help you develop a realistic 50/30/20 budget and determine which expenses can be cut or reduced.

For instance, you might notice that stopping for coffee on your morning commute costs about $40 a week. However, if you start having coffee at the office, you can spend that $160 a month elsewhere.

3. Categorize your expenses

After taking stock of your spending habits, categorize every expense into the “needs,” “wants,” and “savings” buckets.

Your categories might look something like this:

Pie chart illustration of the 50/30/20 budget rule


4. Stick to the 50/30/20 budget and adjust as needed

Once you’ve categorized your expenses, you can calculate how much you can allot for each. Working with the above example of $3,200 a month, the 50/30/20 budget breaks down as such:

Needs: $1,600

Wants: $960

Savings: $640

Housing typically accounts for the biggest expense. Let’s say your portion of the rent is $800 a month. That leaves $800 in your “needs” bucket. If your minimum car payment is $400, you can budget the other $400 for utilities, groceries, and other essentials.

With rising food costs, $400 a month may not seem like enough to cover groceries plus gas and utilities. But remember, you still have 30% of your monthly income budgeted for “wants.” Additional groceries, including splurge items, can come from this bucket. One great thing about the 50/30/20 rule is that a large chunk of your budget (30%) remains flexible.

Benefits of the 50/30/20 budget rule

The 50/30/20 rule offers many benefits over other budgeting methods. Some of its advantages include the following:

  • Providing a clear picture of your finances. With the 50/30/20 budget, you’ll always know where you stand financially. Not only will you start to identify your spending priorities, but you’ll also discover which areas need improvement.
  • Reduced financial stress. Sticking to the 50/30/20 budget gives you more control over your finances, making you less likely to overspend and more confident when making purchases.
  • Simplicity. The 50/30/20 budget rule places every expense into three buckets. With fewer categories than most traditional monthly budgeting methods, the 50/30/20 rule is easier to follow.
  • Flexibility. 30% of your budget is reserved for flexible spending.
  • Emphasis on saving. Even though saving makes up just 20% of the 50/30/20 rule, it’s arguably the top priority because you’re setting aside your savings before you can spend money on your wants and needs. This helps you build an emergency fund, contribute to your retirement, save for a home, and reach other financial goals.

How the 50/30/20 rule compares to other budgets

You may be wondering how the 50/30/20 budget stacks up against other budgets. Let’s look at some popular alternatives:

Pay-yourself-first budget

One of the simplest budgeting methods is the pay-yourself-first budget. Also known as the reverse budget, the pay-yourself-first budget involves funding your savings before anything else. As long as you’re meeting your savings goal, paying your bills each month, and not taking on additional debt, you can spend the rest of the money however you want.

The downside to the pay-yourself-first budget is that it lacks structure. There aren’t any guidelines to help refine your spending habits, make necessary cuts, or develop financial discipline.

Zero-based budget

Zero-based budgeting accounts for every dollar spent. Essentially, it gives every dollar a job so that when everything is accounted for (expenses, savings, and spending), you’re left with $0 at the end of the month.

Also known as zero-sum budgeting, the zero-based budget prevents overspending. It prioritizes your financial goals, but it’s a time-consuming strategy that doesn’t account for variable expenses. As such, this budget can be less flexible and more complicated than other methods.

Envelope method

Envelope budgeting is a cash-based system that uses physical envelopes and cash. Each envelope represents a different category (utilities, groceries, savings, debt payments, etc.). After payday, divide your cash between the envelopes based on how much you’ve budgeted for each category.

The envelope method is a great way to see where your money goes each month because once an envelope is empty, that’s it. You can no longer spend on that category until the next payday.

The downside, however, is that any cash-based budget requires a lot of extra steps. Since most people are paid via direct deposit, you’ll have to withdraw money after each paycheck to stuff the envelopes. Then, you’ll need to re-deposit the funds for any bills you pay electronically.

Is the 50/30/20 rule right for me?

If you’re looking for a simple, flexible budget, the 50/30/20 rule might work for you. It’s an easy-to-follow budgeting method that doesn’t feel restrictive, gives you a clearer picture of your finances, and helps reduce non-essential expenses.

However, the 50/30/20 rule isn’t for everyone. For example, it doesn’t work for low-income earners or those with high housing costs. In addition, the method doesn’t prioritize debt management, which is a drawback if you’re trying to pay off debt or rebuild your credit.

Try the 50/30/20 budget rule

When followed correctly, the 50/30/20 rule can help you stay on financial track and save for the future. So, give it a try and see if this simple budgeting method works for you!

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