Exploring the 50/30/20 Rule: A Simple Budgeting Strategy

It may feel like your expenses come calling as soon as your income hits your account. Money comes in, money goes out. It’s up to you to figure out how to balance your budget to ensure your needs are covered, you can afford your wants, and you’re squirreling away some savings. The 50/30/20 rule is a popular budget rule for helping you achieve just that. It can be a powerful tool for covering your expenses while still prioritizing debt repayment, retirement, and savings goals. Especially if you’re new to budgeting, the 50/30/20 rule can simplify the process to make your money management as easy as possible. 

What is the 50-30-20 budget?

The 50/30/20 budget rule is a budgeting guideline in which you divide your monthly income among three broad categories: 50% to needs, 30% to wants, and 20% to savings/investing. 

• 50% goes to needs: These are your essential living expenses and bills that must be paid; if you have debts, include at least the minimum payments in this category.
• 30% goes to wants: These are the things you’d like to spend money on but could live without.
• 20% goes to savings: This bucket includes sinking funds for short- and mid-term savings goals, your emergency fund, and long-term investments like retirement.

What’s the difference between a want and a need?

What counts as a “want” and what counts as a “need” will look different for different people. 

Your needs are unavoidable bills. These generally include food, housing, transportation, utilities, and debt payments. They can also include things like childcare, medical costs, care for family members, tithing, and more. Think about all the money you have to spend in a month to take care of your and your family’s must-haves: those are your needs.

On the other hand, your wants are the things you’d like to have or do but could do without. Typical wants include things like entertainment, takeout, hobbies, gym memberships, and subscriptions. They can also include things like classes, gadgets, home decor, and other more expensive purchases.

Defining what you need versus what you want is very personal. For one person, a gym membership may be a want, something they enjoy but could give up if they had to. Someone else may be unable to live without a gym membership due to chronic pain or a lack of other options. Similarly, your lifestyle, where you live, who you support financially, and your dependents will all impact what you define as a want versus a need. A single young adult’s budget may look different than one for a family or someone with multiple dependents. For example, a parent working from home who doesn’t have childcare options might see a streaming service subscription as a need if their kids get home from school a couple of hours before the workday ends; that expense may be necessary for their kids to be safely occupied while they get their work done. But a college student who has a tight budget may see that subscription as a nice-to-have.

Organize your needs and wants, on paper or mentally, before you get started making a budget. That way, you’ll go into your 50/30/20 budget with a framework already started.

How do you budget for savings and investing?

The savings category is for your short, mid-term, and long-term savings and investments. There are three primary areas to consider.

• Emergency fund: Your first savings priority is an emergency fund. Many experts recommend keeping six months of expenses in your savings account so you won’t have to struggle if your water heater breaks, your cat needs surgery, or you have an unexpected medical cost. This amount can also be a buffer to get by if you unexpectedly lose your job.
• Savings goals: This is the money dedicated to your short- and-mid-term goals. These goals might include smaller expenses like upgrading your laptop, buying new shoes, or getting tickets to an upcoming concert. You might also have bigger goals like buying a car, funding a wedding, or putting a down payment on a house. The size and type of your goals will vary and change over time.
• Retirement: Finally, putting aside money for retirement is part of your savings/investing category. Most experts recommend you dedicate at least 10%-15% of your monthly income to retirement. Consider starting with a set percentage going into your retirement account and increasing your investments annually. The sooner you start, the better, as your investments can benefit from the power of compounding.

How you save money, how much you’re investing, and what you save for are going to shift over time as you achieve your short-term goals and are able to focus on your long-term investment opportunities. 

How do you budget for debt repayment?

Making the minimum payments on your debts is generally considered a need, because missing those can incur fees, damage your credit score, and even lead to collections. However, paying more than the minimum payments can help you get out of debt faster and reduce the amount of interest you pay in the long run. 

So if you have a lot of high-interest debt, it may make sense to shift the 50/30/20 rule temporarily to pay down your debt faster. You could use a 60/20/20 rule, or even 70/20/10, categorizing extra debt repayment as a need and devoting more of your income to that category.    

5 steps to budgeting with the 50/30/20 rule

Since your budget is unique to your lifestyle and circumstances, there are several steps you need to take to ensure you have all the information you need for a successful 50/30/20 budget.

1. Calculate your monthly take-home income

Step one is to understand what you have to work with. Add up the money you make each month from every income source you have. Look at your paystubs to see your actual take-home pay, which is what you get after you pay taxes. Also include any other money coming in, like child-support payments, interest on savings, side hustles, or second jobs. If you make money as an independent contractor, don’t forget to set aside a percentage of your earnings from taxable income; don’t include the money you’re putting aside to pay your taxes when calculating your take-home income. If your income is inconsistent, consider starting by averaging what you made over the past three months and using that as your framework. 

Once you know how much money you have, it’s time to bucket it based on the 50/30/20 rule. 

2. List all your needs

Next, make a list of your needs, those things you can’t live without. Start with your monthly bills, and then consider your quarterly and yearly expenses. You can account for those expenses by dividing them by three, six, or twelve. 

For example: 

• A quarterly water bill that’s $150 can be budgeted as $50 a month: $150 divided by three months
• If you get a $60 oil change every six months, that could be $10 a month: $60 divided by six months
• A yearly insurance bill that’s $1,200 can be $100 a month: $1,200 divided by 12 months

Now add up all those expenses and see how close you fall to the 50% allocation for needs. If your needs are 50% of your income, or pretty close, you’re ready to take a look at your wants. 

If your needs are more than 50%, look for opportunities to reduce your costs. Are there cheaper options for some of the things on your needs list? Could you get by with a less expensive phone plan? Shop around for lower insurance rates or special internet/phone bundles. Finding less expensive options is ideal, but not always possible. Don’t be afraid to shift to a 60/20/20 structure while you look for cost-cutting opportunities.

3. Determine your wants

Your next priority is understanding your wants. Initially, focus on the money you already spend to see if it adds up to about 30% of your income. Take a look at your transactions over the last couple of months to get a realistic idea of the don’t-need-but-really-want expenses in your life. If the total cost of your wants falls around 30% of your take-home pay, you’re good to go. 

If your wants exceed the 30% allocation, consider prioritizing them so you can cut or delay those with the lowest priority. Be realistic when making these decisions: if you cut out too many of life’s little pleasures, there’s a good chance you’ll start feeling deprived and blow your budget with impulse buys. And on the flip side, if you prioritize lots of wants that don’t really give you much enjoyment, you’re losing the opportunity to save up for the things you truly want down the line.  

Budget tip: If your wants are coming in way over the budgeted 30%, consider shifting the more expensive items to the savings category and saving up for them over the course of a couple of months. This way, you’re sticking to your 50/30/20 rule but can still afford to buy the things you really want by planning ahead.

4. Decide your savings/investing split

The last 20% of your budget is all about savings. Take a look at your short-term, mid-term, and long-term dreams and set your savings goals. What do you want to achieve this year? In the next five years? What about retirement?

Your first priority is likely filling your emergency fund so you can cover the recommended six months of expenses. Once you’ve done that, or if you already have an emergency fund, you’ll want to think about your savings and retirement split.

How you break down your 20% is up to you, but here are some questions that might help guide you as you ponder your options.

• Do you have any big goals coming up, such as a house or wedding?
• Do you have any expected expenses coming up in the next few years, like a new roof, upgraded computer, soccer camp for your kids, or educational courses? 
• How reliable is your income, and how much of a safety net do you already have?
• Are your retirement investments matched by your employer?
• How old are you, and how soon do you hope to retire?

Remember to look at the timeline, size, and priority of your goals. Start as simply as you can; it’s always possible to add goals and complexity over time. 

5. Learn and adjust as you go

Now that you’ve implemented the 50/30/20 rule, it’s time to stick to it and make adjustments along the way. Here are a few tips for making the most of your budget: 

• Create a system. Whether you use an app, spreadsheet, or pen and paper, the 50/30/20 budget will only work if you stick to it. Automating with tools can help, but your priority is creating a sustainable and realistic budget and saving strategy.
• Schedule a regular money date with yourself. Make sure to check your progress. You can start with weekly check-ins to see how it’s going and make adjustments if things aren’t working quite how you planned. If your budget doesn’t work one week, see what went wrong and make the necessary adjustments for the next. The better you understand your income, expenses, and savings, the better you’ll be able to manage your financial health. 
• Celebrate your wins. It’s easy to focus on what didn’t work, but make sure to celebrate your budgeting successes so you stay motivated and excited about managing your money.

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

The 50/30/20 rule is a simple way to make sure you’ve got the essentials,, while still enjoying things you want and putting money into savings and investments. 

Of course, there isn’t a one-strategy-fits-all solution. If you try out the 50/30/20 rule and it isn’t for you, consider giving zero-based budgeting a try. The best budget is one you can stick to and one that gives you confidence with your money. With the right tools and the right budget, you can change your approach to spending, saving, and investing to set yourself up for long-term financial success.

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