50/30/20 Budgeting Rule: What is it [Complete Guide] (2024)

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Are you struggling to stay on track with your budget? Tired of comparing all the detailed categories? The 50/30/20 budgeting rule can be a great tool to keep you going!

After quite some effort you have tried budgeting and you know how much you spend in each category. That’s a great start, congrats!

If you’re not tried budgeting yet, I would recommend you start tracking where your money goes. There are several reasons you want to start a budget, staying on top of your money is one of them.

When you have a budget, the next step is comparing how your budget compares to the ‘ideal’ saving and spending. That’s exactly what the 50/30/20 rule is for.

Simply said: you spend 50% of your budget on needs, 30% on wants, and 20% on savings and debt payoff.

It is a great concept but as with any concept, it doesn’t work for everyone. If you are working towards early retirement, for example, these numbers need to be a tad different. We will get into the details later, no worries.

In this article, you will learn what the 50/30/20 rule is, how to use it, and whether or not it will work for you. Let’s dive right in!

Table of Contents show

What Is The 50/30/20 Rule?

U.S. Senator and Harvard bankruptcy expert Elizabeth Warren talks about the “50/30/20 rule” in her book All Your Worth: The Ultimate Lifetime Money Plan.

This budgeting rule breaks down the ideal spending of your after-tax income. The allocation is as follows:

  • 50% on needs, like groceries, utilities, and housing costs
  • 30% on wants, which includes all luxuries
  • 20% towards debt and savings.

While this rule is definitely not going to work for everyone, it is a great starting point. It provides you with some general guidelines and a point on the horizon where you can aim at.

Once you’re there, you can further optimize and adjust your costs.

How To Use The 50/30/20 Rule?

When you’re wanting to use the 50/30/20 budget rule, there are a few things you need to do. First, you need to calculate your after-tax income. Then you lower your expenses in such a way that you spend 50% on needs, 30% on wants, and have 20% left to save and pay off debt.

Let’s discuss it in more detail.

Step 1: Calculate Your Income After Tax

Calculating your after-tax income is the first step.

Doing this is simple if you have a regular paycheck month-to-month. You take your paycheck and exclude all taxes and social security contributions. If any health care or retirement contributions are done, you add them back in.

If you have your own company, after-tax income is your total income minus your expenses. When you have the amount, deduct the necessary taxes that you need to pay.

If you’re responsible for submitting your own taxes, don’t forget to put them into a separate account so that you will not touch them.

Now you have your after-tax income!

50/30/20 Budgeting Rule: What is it [Complete Guide] (1)

Step 2: Get Your Needs To 50%

Anything that you need, are things that you need to pay every month otherwise your quality of life will suffer.

No, I’m not talking about your Netflix subscription.

I’m talking about your life would be negatively affected if you would not have it in your life, a primary need will not be fulfilled.

Ask yourself: how would my life look without it?

How would your life look without health care? Sky-high medical costs when something happens to you or your family. Having healthcare is definitely a need.

How would your life look if you didn’t pay your minimum on your debt? You would get penalties, extra fees, and you will need to pay more eventually. The minimum amount is a need. Anything above that is a want.

You can take this approach to everything else as well.

What are the things that fit into the needs category:

  • Housing costs – like rent, your mortgage
  • Utilities – like electricity, gas, water, internet
  • Groceries
  • Health care
  • Transportation costs
  • Minimum debt payoff
  • Minimum clothing

When you want to calculate how much rent you can afford, a rent affordability calculator may be your best bet!

Need Or Want?

It can be hard, especially in the beginning, to really know if something is a need or a want. Asking yourself the question: ‘how would my life look without it?‘ can definitely help.

If the difference is not so clear for you yet. Let’s go over a couple of extra examples.

When you don’t get the cheese and wine at the supermarket, that’s a small inconvenience. When you don’t have enough food for dinner, that means a need is not being met.

Anything that is a primary need, you want to have that covered. Things like health care and water are for sure primary needs. The quality of your life would drastically decrease would you not have that.

One thing that is important to take into account as well, is your minimum debt payments. If you don’t pay that minimum balance for your car or for your credit card, this will negatively impact your life.

While your minimum payoff is considered a need, any additional amount that you put towards your debt is not.

When you have all these costs, calculate how much of your after-tax income they take in.

You can do this by: ‘Needs category total spending’ divided by ‘after-tax income’.

Ways to get your needs down to 50%:

  • How I Live On Half My Income – And You Can Too!
  • 7 Ways To Save Money Meal Planning
  • How To Spend Less Than $70 Monthly On Groceries
  • 25+ Incredibly Easy Money Saving Tips
  • How I Cut My Utility Bill In Half

Step 3: Get Your Wants To 30%

Anything that is not a necessary expense for you, goes into this category.

Things that fall into this category are optional, things that you can live without but would rather not.

If you’re going hard on lifestyle inflation and are used to the luxuries you have in life, it can be very difficult to deflate your lifestyle again.

The wants category often includes things that you are used to living with and you are quite used to. Even though they are not needed, you will probably see them as wants.

This could be anything that you don’t really need, for example:

  • Going out to eat
  • Having cable TV
  • Having your subscriptions to streaming services
  • Gifts
  • Going on a (far-away) holiday
  • Entertainment

The rules make sense once you think about it, it is simply a change in mindset.

How to reduce your wants to 30%:

  • 5 Reasons Successful People Wear The Same Clothes Every Day
  • 15 Awesome Frugal Living Tips (How To Be Frugal)
  • Can You Save Money By Bringing Lunch To Work?
  • How I Bought No Clothes For One Year

Step 4: Spend 20% Of Your Income Towards Savings And Debt

At least 20% of your after-tax income should go to repaying various debts and saving or investing.

Good thing is that the minimum payment of your debt goes into the 50% needs category. Things like a minimum car payment, mortgage payment, and minimum credit card payment all go there.

Anything that you choose to add to that, goes to the 20% category.

If you have not yet set up an emergency fund, I recommend you start there. It is great not to go into extra debt when you have an unexpected emergency comes your way.

Emergencies always seem to come at the worst possible time. Prepare for it and don’t ever worry about it again!

50/30/20 Budgeting Rule: What is it [Complete Guide] (2)

If you’re working towards financial independence and/or early retirement, this is also where this goes. Depending on your timeline, you may want to speed things up a bit. If this is your situation, we will go into that with the next point.

Will The 50/30/20 Rule Work For You?

With this budgeting system, there are just three categories that you need to pay attention to. For some people, this will be great. They don’t like the detailed budget and it takes them too much time. For other people, it will be hard to see where you can improve your budget. There are only three categories.

The 50/30/20 rule works for many people. As with anything in personal finance, it is personal whether or not this will work for your specific situation.

The most important thing is that it fits your goals and your needs, so ask yourself if this would work for you.

It Won’t Work If You’re Working Towards Financial Independence

If you’re working towards FIRE (financial independence and retire early) it may be hard to get there when you save only 20%.

I know many people who are working towards FIRE and are saving anywhere between 40-60% of their income. Some higher, some lower. It depends highly on your earnings and how much you’re spending on the big three – housing, transportation, and food.

If you want to earn some extra money, it may be a good idea to start a side hustle. There can be many different things that you want to do. You can work as a virtual assistant, sell the stuff in your house, start a blog, and much more.

When you want to earn some extra money through a side hustle, here are some of my favorite side hustle:

  • 6 Side Hustles That Pay Me Over $100 Per Month
  • 15 Best Passive Income Ideas This Year
  • How To Make Money Starting A Blog
  • Start With Peer-to-Peer Lending For Passive Income Today!

Conclusion – 50/30/20 Budgeting Rule

When you’re not into the nitty-gritty of your budget, the 50/30/20 budgeting rule may work for you. There are only three categories that you need to track, which makes you focus on the overall numbers.

A lot of people love it! It is great when you want to get a hold of your spending and bring your spending down to the designated categories.

Do you use the 50/30/20 rule?

50/30/20 Budgeting Rule: What is it [Complete Guide] (3)

Marjolein Dilven

Founder of Spark Nomad, Radical FIRE, Journalist

Expertise: Personal finance and travel content
Education: Bachelor of Economics at Radboud University, Master in Finance at Radboud University, Minor in Economics at Chapman University.
Over 200 articles, essays, and short stories published across the web.

Experience: Marjolein Dilven is a journalist and founder of Radical FIRE, a personal finance platform, and Spark Nomad, a travel platform. Marjolein has a finance and economics background with a master’s in Finance. She has quit her job to travel the world, documenting her travels on Spark Nomad to help people plan their travels. Marjolein Dilven has written for publications like MSN, Associated Press, CNBC, Town News syndicate, and more.

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50/30/20 Budgeting Rule: What is it [Complete Guide] (2024)

FAQs

50/30/20 Budgeting Rule: What is it [Complete Guide]? ›

The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.

What is your guide to the 50-30-20 budgeting rule? ›

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 be split between savings and debt repayment (20%) and everything else that you might want (30%).

What does a 50-30-20 budget look like? ›

One of the most common types of percentage-based budgets is 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.

What is one negative thing about the 50-30-20 rule of budgeting? ›

Some Experts Say the 50/30/20 Is Not a Good Rule at All. “This budget is restrictive and does not take into consideration your values, lifestyle and money goals. For example, 50% for needs is not enough for those in high-cost-of-living areas.

What is the alternative to the 50-30-20 rule? ›

Alternatives to the 50/30/20 budget method

For example, like the 50/30/20 rule, the 70/20/10 rule also divides your after-tax income into three categories but differently: 70% for monthly spending (including necessities), 20% for savings and for 10% donations and debt repayment above the minimums.

Can you live off $1000 a month after bills? ›

Getting by on $1,000 a month may not be easy, especially when inflation seems to make everything more expensive. But it is possible to live well even on a small amount of money. Surviving on $1,000 a month requires careful budgeting, prioritizing essential expenses, and finding ways to save money.

How do you distribute your money when using the 50 20 30 rule? ›

Those will become part of your budget. The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals. Let's take a closer look at each category.

What are the three 3 common budgeting mistakes to avoid? ›

8 Common Budgeting Mistakes You Should Avoid
  • Ignoring Debt Management. ...
  • Overlooking Small Expenses. ...
  • Failing to Plan for Emergencies. ...
  • Setting Unrealistic Budget Goals. ...
  • Neglecting to Review and Adjust the Budget. ...
  • Forgetting Seasonal and Irregular Expenses. ...
  • Lack of Prioritisation in Spending.
Apr 29, 2024

Is the 50/30/20 rule still realistic? ›

"People may be unable to use the 50/30/20 budget right now because their needs are more than 50% of their income," Kendall Meade, a certified financial planner at SoFi, said in an email.

What is the Dave Ramsey budget rule? ›

The formula is really simple: Monthly income minus monthly expenses = zero. If your monthly income is $5,000, you list $5,000 in expenses. If there is $200 left after listing expenses, find a place for it so your bottom line reads zero.

What is the best time to start saving for retirement? ›

WHEN SHOULD YOU START SAVING FOR RETIREMENT? At first blush, the answer is quite simple: you should start saving for retirement as soon as possible. The earlier you start, the more time your money has to grow. In fact, the amount of time you have money invested can be even more important than how much you invest.

How much money should you have left over every month? ›

One popular guideline, the 50/30/20 budget, proposes spending 50% of your monthly take-home pay on necessities, 30% on wants and 20% on savings and debt repayment. The necessities bucket includes non-negotiable expenses like utility bills and the monthly minimum payment on any debt you have.

How to do the math for the 50 30 20 rule? ›

Applying the 50/30/20 rule would give you a budget of:
  1. 50% for mandatory expenses = $2,000 (0.50 X 4,000 = $2,000)
  2. 30% for wants and discretionary spending = $1,200 (0.30 X 4,000 = $1,200)
  3. 20% for savings and debt repayment = $800 (0.20 X 4,000 = $800)
Oct 26, 2023

What is the 50 30 20 budgeting rule and how people could benefit from this? ›

The 50/30/20 rule designates 50% of your income to needs, 30% to wants, and 20% to debt or savings. Careful tracking of your spending is crucial to making a 50/30/20 budget work. This approach is best for people who are paid regularly and don't have high-interest debt.

What is the 50 30 20 rule in your financial plan? ›

The 50-30-20 rule is a common way to allocate the spending categories in your personal or household budget. The rule targets 50% of your after-tax income toward necessities, 30% toward things you don't need—but make life a little nicer—and the final 20% toward paying down debt and/or adding to your savings.

What is the 50 30 20 tool for budgeting? ›

A 50 30 20 budget divides your monthly income after tax into three clear areas. 50% of your income is used for needs. 30% is spent on any wants. 20% goes towards your savings.

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