What is the 50/30/20 Budget Rule?

Excel® spreadsheets and high-tech apps may work for some savvy spenders, but you're not alone if you prefer a more straightforward way to manage your money.

One popular — and simple — approach is the 50/30/20 budget rule. Let’s explore how the rule works and how to try it yourself.

How the 50/30/20 budget rule works

While some budgeting approaches may seem complicated — especially if you’re new to tracking your spending — the 50/30/20 rule is known for being easy to use no matter your income or budgeting experience. The 50/30/20 rule is a budgeting method that helps you split your after-tax income, also called take-home pay, into three categories: needs, wants and savings.

50% for needs

Under the rule, half of your take-home pay should go toward essential costs, like:

• Rent or mortgage
• Utilities
• Groceries
• Transportation
• Childcare, tuition and other education costs
• Health insurance
• Car insurance
• Minimum payments on loans or credit cards

30% for wants

The rule also leaves room for you to spend money on those little “extras” that make life more comfortable, including:

• Subscription services
• Travel
• Dining out
• Entertainment
• Memberships
• Shopping

20% for savings and repaying debt

Devoting money to building your savings and paying down debt is another key feature of the 50/30/20 rule. Depending on your goals, you could split 20% of your after-tax income between:

• Building an emergency fund
• Saving for retirement
• Setting aside money for long-term financial goals like purchasing a home or vehicle
• Paying more than the minimum payment toward loans or credit card debt

The idea is to organize your money so that your most important expenses are always covered while leaving room to do what you enjoy and work toward your goals.

How to get started with the 50/30/20 rule

Think the 50/30/20 budgeting rule could be for you? Getting started is simple with these basic steps.

1. Calculate your net income

The 50/30/20 rule is based on your net income, or the pay you take home after taxes and other deductions. This information is listed on your paystub. Make sure you use your net pay and consider any other deductions that are subtracted from your paycheck, such as health insurance or 401(k) contributions, when applying the 50/30/20 rule. ¹

2. Divide your net income into categories

Next, figure out how much money you’ll need to spend in each category. For example, if you take home $5,000 per month, your spending might look like this:

• $2,500 for needs (50%)
• $1,500 for wants (30%)
• $1,000 for savings and repaying debt (20%)

3. Compare the 50/30/20 rule to your current spending

Look at your monthly spending to see whether it aligns with the numbers you found in the last step.

Are you spending more than 30% of your income on wants? You could find ways to redirect that money toward savings instead.

Perhaps you live in an area with a high cost of living, and your rent costs, insurance premiums and other essential expenses total more than 50% of your total income. If so, you may put more than 50% of your income toward your needs.

Ultimately, the 50/30/20 rule is a guideline. You can bend the rules and tweak the percentages to reflect your lifestyle and goals, as needed.

4. Be consistent

Following your new spending plan consistently may help ease your money worries while paving the way to a more secure financial future.

If you need help creating a saving routine you can stick to, consider these options:

• Setting up automated transfers from checking to savings through your banking app
• Having your employer deposit 20% of your paycheck in a different savings account than where the rest of your pay goes
• Taking advantage of deductions for retirement accounts, like your 401(k)

Alternatives to the 50/30/20 budget rule

If the 50/30/20 rule doesn’t seem right for you, one of these alternatives may be a better fit:

• Zero-based budgeting: A method of budgeting that makes every dollar count. You match every dollar of your income to specific spending categories to make sure your total planned expenses, including savings, equal the exact amount of money you earn ²
• Pay-yourself-first budget: A spending plan where you set aside part of your earnings for savings or investments before paying bills or buying “extras” ³
• Multiple account method: Using separate bank accounts for essential expenses, discretionary spending and savings to stay organized and more easily monitor your progress toward financial goals ⁴
• Envelope method: Using cash and physical envelopes or a banking app to separate your take-home pay into specific categories and more easily visualize your spending ⁵

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Balanced budget, balanced life

The best budget is the one that truly works best for your needs. Some people find that the 50/30/20 rule makes it easier to stick to a budget, since it emphasizes saving while leaving room for fun “extras,” too. Others find it too vague and prefer a more detailed budgeting method.

If you prioritize your long-term goals and have the funds you need to cover everyday expenses, your budget can be considered a success, regardless of your approach.

Sources:

1. https://www.nerdwallet.com/article/finance/nerdwallet-budget-calculator
2. https://www.experian.com/blogs/ask-experian/what-is-zero-based-budgeting/
3. https://www.experian.com/blogs/ask-experian/what-does-it-mean-to-pay-yourself-first/
4. https://www.experian.com/blogs/ask-experian/how-to-budget-using-multiple-accounts/
5. https://www.nerdwallet.com/article/finance/envelope-system