What Is The 50/30/20 Rule?
![50/30/20 rule](/personal-finance/static/2ee1d3fe0c9efbe4d9df11513bfb086a/8ae18/50-30-20-rule.jpg)
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Creating a budget and sticking to it over the long term is one of the most basicโbut also one of the most importantโways to shore up your finances. Creating clear guide rails for your spending helps ensure that you minimize debt and save for your future needs.
There are any number of ways to track where your money is going. But one of the most popular is an approach known as the 50/30/20 rule. Itโs simple to understand and can be highly effective when it comes to curbing your non-essential expenses.
The basic idea of the 50/30/20 rule is simple. You allocate 50% of your post-tax income to โneedsโ and another 30% to โwants.โ That leaves you with at least 20% of your net income that youโre able to save or use to pay down existing debt.
By only spending 80% of your paycheck on todayโs needs and wants, youโre left with a significant amount of cash with which you can concentrate on future needs. Reducing your debt load and increasing your savings means youโll have less stress and more freedom to pursue your goals.
When you implement the 50/30/20 rule, youโre allowed to spend up to half of your take-home pay on non-discretionary expenses. The word โneedโ is open to some interpretation, of course, But usually itโs a bucket that typically includes:
What if these line items are consuming more than 50% of your after-tax income on a monthly basis? You may have to adjust what you consider a โneed.โ
Could you reasonably live in a smaller home or one thatโs in a slightly less desirable neighborhood? Is there a more affordable way to get around, like public transportation or a cheaper set of wheels?
As painful as those moves may be, sticking to your budget can mean less financial strain over time and the ability to save for the goals youโre truly passionate about.
The 30% of your income allotted for โwantsโ can be spent on non-essential purchases, such as:
By carving out 30% of your budget for discretionary spending, you likely wonโt be living like a monk. But you may have to prioritize which expenses give you the most satisfaction. You can then cut out any remaining costs that contribute relatively little to your happiness.
Perhaps youโve been meeting up twice a week with friends for dinner or drinks, when youโd be fine allowing yourself a once-a-week outing. Or you may find that youโve been paying for a gym membership that you rarely use, which opens up your โwantsโ category for more important purchases.
The remaining 20% of your income is earmarked for savings and debt repayments, ensuring that youโre on solid financial footing down the road.
Typically, building an emergency fund that can cover three to six monthsโ of living expenses should be your top priority with this portion of your budget. Having just-in-case money set aside means you can manage a temporary job loss or a major, unexpected bill without immediately upending your lifestyle.
Once you have a solid emergency fund in place, you can turn your attention to paying down any credit card balances or other high-interest debts. Credit lines and loans with lofty annual percentage rates (APRs) can wreak havoc on your financial life, forcing you to shell out substantial sums just to make your interest charges. When youโre able to pay those down, youโll have more money to spend on things that actually give you satisfaction.
Finally, when you have emergency money in place and no more โbadโ debt, you can turn your focus to saving for long-term goals. Even if you start young, the average adult needs to regularly contribute 10% to 15% of their income to a retirement account to stay on track.
You can use the remaining 5% to10% of income in your savings bucket to accumulate assets for medium-term goals, such as buying a new home or starting a business. Keep in mind that some of the best savings accounts and certificates of deposit (CDs) can be found at online banks like CIT or Quontic, which provide a significantly higher interest rate than traditional brick-and-mortar institutions.
Letโs suppose your monthly gross pay is $5,000, but taxes reduce that amount to $4,000. The $4,000 of after-tax wages are what youโd use when dividing your income according to the 50/30/20 budgeting rule.
That means youโd have $2,000 (50%) designated for needs, like housing, groceries, and minimum loan payments. It should also include any health insurance premiums that were deducted directly from your paycheck.
You would then have $1,200 (30%) of your after-tax income for wants, like going out to dinner or spending money on hobbies like sports or entertainment. That leaves $800 (20%) with which you can aggressively pay down high-interest debts or save for future needs.
One obvious benefit of using these categories is that it keeps you accountable for your spending. You have to label literally every transaction you make as a โneedโ or a โwant,โ which gives you a more nuanced view of how youโre spending your money. While managing your money with that level of detail can be a grind at times, youโll be better able to spot habits that you may have missed before.
The 50/30/20 budget rule also helps identify your true priorities. Rather than just saving whatโs left over at the end of every month, if anything, youโre making it your goal to always save 20% of your post-tax income. Because youโre only allowing yourself to spend 80% of what you bring in, youโre forced to figure out which expenditures are worth it to you and which arenโt.
If youโre not used to budgeting at all, stepping right into the 50/30/20 system can be a challenge. Here are a few tips to help make the transition easier.
For many people, the 50/30/20 rule works extremely wellโit provides significant room in your budget for discretionary spending while setting aside income to pay down debt and save. But the exact breakdown between โneeds,โ โwantsโ and savings may not be ideal for everyone.
If youโre behind on your retirement savings or have a lot of credit card debt to pay down, you might want to allocate more than 20% of your take-home pay to that category. And if your essential expenses only take up, say, 40% of your budget, you might find that you can raise the cap on โwantsโ accordingly or better yet, savings.
Even for budget hawks, categorizing every single dollar you spend can be a tricky task. So if you simply save whatโs left over at the end of the month, you may find that youโve already spent more than 80% of what you brought home.
One solution is to flip things around, diverting a portion of your income to savings (or debt reduction) right when you get paid. If you have an employer-sponsored retirement plan, you may be doing that already. But even if you invest through an individual retirement account (IRA), you can set up automatic contributions that happen to coincide with your payday. You can also schedule credit card or other loan payments right when you get paid.
There are any number of budgeting apps that you can link to your banking and other financial accounts to give you a more holistic view of your spending. Using these tools makes it a lot easier to follow the 50/30/20 rule.
Apps like Monarch automatically categorize transactions into specific default categories or customized categories that you create. So even if you have multiple cards in your wallet, the process of tallying up your wants and needs is significantly simpler. The app also tells you how much money is going into your savings or retirement accounts, which makes it easier to set aside 20% of your income for long-term needs.
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Budgeting app | Simplifi | Empower | Monarch |
Cost | $2.39 a month (LIMITED TIME 3-month free trial to existing Mint users) | Free | $14.99 a month or $99 a year |
Description | Starts with tracking expenses to build a personalized budget based on your preferences, like zero-based budgeting or 50/30/20 | Tracks net worth, budgeting, and automatic categorization; you can add investment management services for an additional cost | Budget creation with or without a partner (you can even invite your financial advisor) and also track investments |
View Offer | View Offer | View Offer |
There are many different systems designed to help you reign in your spending. The virtue of the 50/30/20 rule is its simplicity. For those who are naturally averse to budgeting, it helps you prioritize savings and debt reduction, while giving you a realistic amount of room for discretionary expenses.
Mortgages, auto loans, and other installment loans go in the โneedsโ category. So do the minimum payments on your credit card because you have to pay at least that amount every month to avoid fees and negative marks on your credit report. Any amounts that you pay down in excess of the minimum payment, however, would go under the savings and debt reduction category.
The basic concept behind the 50/30/20 rule works for just about anyone. But depending on your income and debt load, you may need to adjust the exact breakdown of your expenses.
For example, a low-income household may need to spend more than 50% of their after-tax pay on needs. In that case, they may have to reduce the other two categories accordingly. And if you have a large amount of high-interest debt that you want to pay down, you may need to set aside more than 20% of your net pay for savings and debt reduction.
One of the challenges to implementing the 50/30/20 rule is actually finding a way to figure out how much of your money is going into each category. You can do this manually by going through your bank and credit card statements every month and parsing out which transactions belong in each bucket.
However, the process is usually a lot simpler when you use a budgeting app thatโs linked to all your financial accounts. For example, the First Citizens Bank Manage My Money Tool, available with its checking account, helps you track your expenses by category. You can create expense subcategories or even split expenditures among categories.
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