50/30/20 Budgeting Rule

What Is the 50/30/20 Rule?

The 50/30/20 rule is when you allocate 50% of your after-tax income to needs/must-haves, 30% to things you want but don’t need (nice-to-haves), and 20% to savings. This strategy will help you create a budget that focuses on prioritizing your necessary expenses while still allowing you to save.

Key Things to Know About 50/30/20 Rule

• It uses your after-tax income to prioritize 50% of your money for things you need, like housing and groceries. These expenses are referred to as must-haves in your WalletHub budget.
• After your needs are taken care of, the remaining amount gets split up with 20% going to savings and 30% going to things you don’t absolutely need, like streaming services and vacations. We like to call these items nice-to-haves.
• This rule is a guideline that helps you save for the future while taking care of the essentials.
• It may not be ideal for people in areas with a high cost of living or with irregular paychecks.
• Compared to other popular budgeting methods, like zero-based budgeting or envelope budgeting, the 50/30/20 rule is less time consuming to follow since it doesn’t require you to anticipate every single expense. However, 50/30/20 requires you to separate needs from wants, which you wouldn’t have to do with a strategy like 70/20/10.

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How Does the 50/30/20 Rule Work?

With the 50/30/20 rule, you are creating a budget that takes your paycheck and splits it into three separate categories: needs/must-haves (50%), wants/nice-to-haves (30%), and savings (20%). You start by listing your expenses and putting them in their corresponding categories. Then, check to see if any of the categories are going over their allocated percentage, and adjust by cutting unnecessary spending until the budget is balanced.

Below is a breakdown of how you can split things up.

Allocate 50% of Your After-Tax Income to Needs (i.e. Must-Haves)

Needs are bills that must be paid or expenses that are necessary for your survival. These can include:

• Mortgage or rent payments
• Food
• Utility bills
• Minimum credit card or loan payments
• Insurance or health care costs
• Transportation costs
• Child care

Allocate 30% of Your After-Tax Income to Wants/Luxuries (i.e. Nice-to-Haves)

Wants are things that you enjoy spending money on but are not essential for living. These can also be upgraded items, such as buying an expensive case of sparkling water versus drinking tap water.

Other items include:

• Gym memberships
• Dining out
• Vacations
• Streaming services
• Sporting events, movies or concerts
• Unnecessary jewelry, clothing, or accessories
• Supplies for hobbies

Put the Remaining 20% in Savings

This bucket is for money that you put away for the future, such as investments and deposits into a savings account. This can also include extra payments you make toward debt, like loans and credit cards, outside of the minimum payment.

Examples of what would be under the savings category include:

• Contributions to an IRA or 401k account
• Building an emergency fund to cover three to six months’ worth of expenses
• Putting funds into a savings account to reach long-term financial goals like amassing a down payment for a house
• Adding funds to an investment account
• Paying down your debt by making extra payments above the minimum amount on your credit cards or loans

50/30/20 Rule Example

Say, for instance, your job pays you $5,000 per month after taxes. The first half ($2,500) will go to necessities. The other half will be for your wants and savings. The breakdown of your expenses could look like the table below if you follow the 50/30/20 rule.

Pros and Cons of the 50/30/20 Budget Rule

The biggest pro to the 50/30/20 rule is that it promotes saving, while the biggest con is that it won’t work for everyone, especially those in areas with a high cost of living. It may be unrealistic for people in these areas to keep their necessary expenses to only 50% of their income.

Pros

• Easy to understand. The 50/30/20 rule doesn’t involve any complicated calculations. The straightforward percentages help you figure out how much to spend in each category.
• Promotes saving. Allocating 20% to saving every month gives you the opportunity to accrue funds for the future, whether that is to save for a down payment on a home or to build an emergency fund to cover unexpected expenses, for example. Some other budgeting methods don’t specifically allocate a portion of your income to saving, so you might only put money away if you have any funds left over after taking care of your living expenses.
• Gets you in a budgeting mindset. Using this budgeting rule allows you to see where your money is going and can help you figure out where you can cut back, if needed.

Cons

• Doesn’t account for irregular paychecks. This rule may be tough to follow for people whose income changes every month, like freelancers or those who are self-employed.
• Won’t work so well for people in areas with a high cost of living. In areas with a high cost of living, the “needs/must-haves” category may exceed 50%, and it may be an unrealistic goal.

50/30/20 Budgeting Tips

Track your expenses.

Use budgeting tools like the ones available on WalletHub to track where your money is going. This can help you get a better understanding of how you’re spending your money. It’s also a great way to see if you need to cut back on certain categories.

For example, if your must-haves are more than 50% of your take-home pay, see if there is anywhere you can cut back. One way is to pare down your wants list, such as not paying for streaming services or dining out at restaurants, to cover your extra needs.

Focus on your after-tax income.

Make sure you are focusing on the income you can actually use. Your gross income is not the money that will hit your bank account. Instead, look at your income after taxes. That is the amount that you will split into the three categories of needs, wants, and savings.

Automate your savings.

Set up your checking to automatically transfer funds to your savings, IRA, or investment account. It will be one less step you would have to do every month as part of the 50/30/20 rule.

Stay committed.

Budgeting is not only about knowing where your money is going, but also about achieving financial goals over time. You will have to monitor your budget weekly or monthly and adjust your spending to stay aligned with the 50/30/20 rule.

Consider alternatives.

The 50/30/20 rule may not be ideal for everyone, especially for people with a high cost of living. If it doesn’t fit your lifestyle and goals, you could try other options, such as zero-based budgeting or envelope budgeting.

For more information, you can check out other budgeting tips right here on WalletHub.