What Is the 50/30/20 Budget Rule?

Managing your money can feel overwhelming, especially when you don’t know where to start. If you’re looking for a simple but effective approach to dealing with your finances, many experts recommend following the 50/30/20 budget rule.

Here’s more about how the 50/30/20 rule works and how you can use it to help you achieve your long-term financial goals.

What is the 50/30/20 budget rule?

The 50/30/20 rule is a budgeting guideline that suggests dividing your post-tax income into three main categories: needs, wants and savings.

Financial experts recommend the 50/30/20 budget rule because it provides a balanced approach to money management. It’s not so strict that you’ll have to cut out all extra spending, but this method will hold you accountable as you take steps toward achieving your goals.

Here’s a closer look at each category.

50% for needs

Following the 50/30/20 rule, the largest portion of your income should go toward needs. These are the essential expenses required to maintain your basic well-being. Think survival, not luxury.

This category is the foundation of the budget, so be honest with yourself about what truly is a need versus a want. Here are some expenses that typically fall under the needs category:

• Groceries for you and your family
• Housing, such as rent or mortgage payments
• Utilities, including electricity, gas, water and other needs
• Transportation, such as car and insurance payments or public transportation fees
• Health care, including insurance premiums, co-pays, prescription medications and any other necessary medical expenses
• Child care, including the cost of day care, babysitting and other dependent care services
• Minimum debt payments toward credit cards, student loans and other bills

Note that anything beyond the minimum debt payment is not considered a necessity and should be included under the savings category. We’ll talk more about that in just a minute.

30% for wants

Once you’ve paid for your needs, you can think about your wants. The 50/30/20 rule suggests spending no more than 30% of your income on the things you enjoy that aren’t considered necessities.

Examples of wants:

• Entertainment, including movies, concerts, sporting events and other interests
• Dining, such as restaurant meals or takeout orders
• Shopping, including clothes, electronics and home decor purchases
• Personal care, such as haircuts, spa treatments and gym memberships
• Travel, including flights, accommodations and activities

Consider the products and services you regularly spend money on. Which are the most important to you? Which ones give you the most value for your money?

20% for savings

The final category of the 50/30/20 rule advises putting 20% toward your savings. This could mean building your emergency fund, adding to your retirement savings or making more than your minimum payment on a credit card or loan. 

In general, this category focuses on making sure your financial future is solid. What you choose to save, and what you choose to save it for, will depend on your savings goals. 

Here’s what generally falls under the savings category: 

• Emergency savings, which should typically cover three to six months of living expenses
• Retirement savings, such as contributions to 401(k) plans or individual retirement accounts (IRAs) 
• Investments, including stocks, bonds, mutual funds and other assets that grow your wealth over time 
• Down payments, such as the down payment on a car or a house

Debt repayments beyond the minimum amount due also fall into the savings category. This is because making the minimum payment is required, but anything extra will depend on your supplemental income.

How to follow the 50/30/20 rule

If you’re ready to implement the 50/30/20 budget rule, know that you don’t need to make drastic changes overnight. You can gradually shift toward a more balanced financial life. 

Follow these five steps to start using the rule in your household: 

1. Understand your income: Make sure you know your net income — your earnings after taxes, benefits and other deductions — as this is the amount you actually have to spend. Your pay stubs typically include your gross and net pay. 
2. Track your spending: Next, list every monthly expense. Include everything from your rent payment to your Netflix subscription. Don’t leave anything out. Receipts, bank statements and credit card bills can help in this process. 
3. Categorize your expenses: Once you have your list, put each expense into one of three buckets: needs, wants and savings. Pay attention to the percentage of your income that goes to each category and make adjustments as needed. 
4. Set financial goals: Use your post-tax income to determine how much you should save each month. Identifying what you’re saving for is also important because it can help you stick to your savings goal. 
5. Automate your savings: Another way to stick to your goal is to automate the process. This could mean setting up automatic transfers from your checking account or working with your employer to have a portion of your paycheck deposited into a savings account.

Pros and cons of the 50/30/20 budget rule

More on the benefits of the 50/30/20 rule

This budgeting method tends to be popular because it helps you prioritize your spending and build a healthier relationship with money. These are some of the reasons the 50/30/20 budget can be an attractive option:

• It shows you exactly where your money is going. By categorizing your expenses, you can gain valuable insights into your spending habits. You might realize you’re spending more on wants than you thought, allowing you to identify areas to cut spending. 
• It provides a simple way to budget. It is easy to set up and to maintain, with just three categories. You won’t have to track every dollar or purchase special software.
• It reminds you to save. You won’t be neglecting your savings (or essentials) and long-term financial goals while overspending on luxuries. The 50/30/20 rule promotes balance, and people who follow it are less likely to live paycheck to paycheck.
• It creates improved financial awareness. Building this budget and sticking to it can help you become more mindful about your spending. You’ll know the boundaries of your spending but should plan to regularly review expenses and adjust as needed.

Is the 50/30/20 budget rule right for you?

The 50/30/20 budget rule can work for some people, but others may need to make adjustments to suit their finances. Keep in mind that the percentages are only guidelines. 

Let’s say you live in an area with a high cost of living. You may not be able to keep your essentials to 50% of your take-home pay and may need to spend less on wants.

Maybe you don’t have an emergency fund to fall back on, so you may decide to save more than 20% of your income until you have a sufficient safety net. 

If you’re aiming to stick to the percentages as is, try not to be discouraged if you don’t hit them exactly every month. The key is to focus on mindful spending, prioritize your financial goals and strive for incremental progress.

Frequently asked questions

What is the 50/30/20 saving rule?

The 50/30/20 saving rule is a popular budgeting technique. With the 50/30/20 rule, your after-tax income goes to three broad categories: 50% to needs, 30% to wants and 20% to savings.

Can the 50/30/20 rule work for variable incomes?

The 50/30/20 rule can work for variable incomes, though you will need to track your income carefully. Instead of relying on a single month’s income to set your budget, use several months to calculate your average income per month and then proceed.

When using the 50/30/20 rule to budget, what category are loan payments in?

The 50/30/20 rule categorizes loan payments as needs, and 50% of your income goes toward these essential expenses. Anything beyond the minimum loan payment falls into the savings category.