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Budgeting isn’t on top of many people’s to-do lists. It can feel time-consuming — not to mention stressful to track your spending. And if you don’t have a budget, you may have no idea where to even start.
There are probably a thousand different ways to budget, but the 50/30/20 rule may be the simplest. Here’s how it works — and how to make it work for you.
What is the 50/30/20 budgeting rule?
The 50/30/20 rule is a straightforward and effective way to budget.
This guideline divides your monthly income into three categories: 50% for needs, 30% for wants, and 20% for savings. That’s it.
The “needs” category includes expenses like rent, groceries, utilities, and transportation. The “wants” category includes discretionary spending, such as dining out, entertainment, and vacations. The “savings” category focuses on setting money for emergencies, future goals, or paying off debts.
For example, let’s say you take home $6,000 after taxes each month. Based on the 50/30/20 rule, you should spend $3,000 on your needs and $1,800 on things you enjoy (but could live without). Then, the remaining $1,200 should be put into savings or towards paying off debt.
By following this rule, you can make sure you’re meeting your basic needs, enjoying some of life’s pleasures, and building your savings.
Let’s take a closer look at each category.
50% for needs
Think about the things you have to pay for each month — like having a roof over your head, food in your pantry, and a car to get to and from work.
Your biggest necessary expense is likely housing, including rent or mortgage payments. This cost may often make up the bulk of that 50%, says Joshua McClellan, senior financial advisor at Empower.
“Someone with a low income in a high-cost-of-living area may struggle to spend only 50% on needs,” he says. “Especially given that, with the high housing costs, many people spend 50% of their income on housing alone.”
With that in mind, it’s important to consider other ways to rein in the price tag on your other essential expenses. This could include shopping sales at the grocery store or lowering your energy consumption to save on utilities. It could also mean taking a closer look at your insurance policies, says Elliot J. Pepper, a certified financial planner at Northbrook Financial.
“Every year without fail, we find clients that haven’t reviewed their homeowners’ or renter’s insurance policy in years,” Pepper says. “Simply getting re-quoted can often lead to lower premiums and money saved for the same coverage as before.”
30% for wants
Life is meant to be enjoyed — which may mean spending on things that bring you joy but aren’t essential for your basic needs. This guideline gives you the freedom to treat yourself without compromising financial stability.
Wants include things like dining out, going to the movies, pursuing hobbies, or going on vacation.
However, try not to enjoy it too much. If you’re responding yes to every social event, going out to dinner many times each week, and booking luxury vacations, you can quickly rush past that 30% mark.
This is a great area of your budget to focus on cutting back when needed. For example, you could cancel unused subscriptions or cook more at home instead of eating out.
20% for savings
After paying for what you need and want today, it’s time to set aside money for the future.
The 20% savings bucket isn’t as well-defined as the wants and needs categories. You need to save for emergencies, along with medium-term goals like buying a house and long-term goals like retiring. Plus, this category isn’t just about saving money — it’s also about paying off debt to save yourself from extra interest charges.
What if you want to build an emergency fund and pay off debt? You may want to focus on both, building up a small nest egg while making payments towards your bills.
Making the 50/30/20 budgeting rule work for you
If you know exactly how much you’ll earn every month, the 50/30/20 rule can be a helpful framework. But if you’re a gig worker or freelancer with fluctuating income, using the 50/30/20 rule can be a lot more challenging to follow. The same goes for those with low cash flow.
“It is much harder for someone whose needs take up 80-90% of their income,” says McClellan. “It’s not realistic to expect to spend nothing on wants and put 10% into savings and debt reduction until the financial situation improves.”
In these situations, “a more customized approach to spending and saving makes more sense, McClellan says.
That doesn’t mean ditching the 50/30/20 framework altogether but focusing on the importance of that last category — savings. Saving anything, even a small amount, is an important habit to build over time.
The bottom line
If you don’t have a budget, the 50/30/20 rule is a good place to start. Review your income and essential expenses, and see what’s left over.
Keep in mind that even if this rule works now, it isn’t always going to be perfect. Pepper points out that “the reality for most people is that life does not care about your 50/30/20 financial plan.”
“Sometimes, you might need to adjust the percentages or forgo some portion of them altogether,” Pepper says. “I advise using the 50/30/20 rule as a guardrail, but realize that just like guardrails will twist and turn on a road, your financial guardrails will also need to be flexible.”
Opinions expressed are author’s alone, not those of any bank, credit card issuer, or other entity. This content has not been reviewed, approved, or otherwise endorsed by any of the entities included in the post.
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