Does the idea of budgeting cause you to break out in a cold sweat or shrink in fear? You’re not alone. The 50/20/30 rule may ease your fears and make budgeting more straightforward.
There are many reasons to develop a budget. Maybe your bank account balance is nearing the single digits too often. Or your emergency fund is smaller than recommended. Or you have a future purchasing goal. Whatever the reason, you’re ready to take a closer look at your finances and put a budget to work for you.
This budgeting tactic aims to help you know where your money is going each month without having to micro-manage every penny. Sound good? Let’s dig in.
The 50/20/30 budgeting method recommends that you divide your after-tax income into three categories:
- Necessities – 50% of income
- Savings – 20% of income
- Wants – 30% of income
What is the 50/20/30 rule of thumb?
Necessities
A maximum of 50% of your take-home pay should go toward living expenses. Housing payments, groceries, and transportation are examples of items that fall within this category.
Savings
The “20” of the 50/20/30 rule means you’ll use 20% of your budget to fund savings goals, retirement contributions, and extra debt payments.
NOTE: You should include minimum required debt payments under Necessities, not Savings.
Wants
The remaining 30% of your paycheck can be used for eating out and other entertainment expenses.
So, if you have $3,000 per month in after-tax income, your budget would be:
- $1,500 for Necessities
- $900 for Wants
- $600 for Savings
The $1,500 (Necessities – 50%) would cover such things as:
- Rent/mortgage
- Groceries
- Transportation (car payment, fuel, and other essential transportation costs)
- Car insurance
- Utilities
- Minimum debt payments (credit cards, student loans, etc.)
- Healthcare insurance
This category generally would not include streaming subscriptions, gym memberships, or other discretionary services.
The $600 (Savings – 20%) can include such things as:
- Retirement plan contributions
- Emergency fund savings contributions
- Savings for a large purchase, special event, or occasion
- Additional payments toward debt reduction
Use the remaining $900 (Wants – 30%) on anything you desire, including entertainment, internet services, or a gym membership.
How can the 50/20/30 rule help guide my financial choices?
You can use the 50/20/30 rule to decide if your budget is on target. Begin with the Necessities. Once you’ve established your 50% figure, you have the flexibility to increase certain expenses while decreasing others within that category. For example, can you handle an increase in rent or a new auto loan payment? Or do you need to cut some of your other costs first? As long as the total doesn’t exceed the designated percentage, congratulate yourself for sticking to your budget!
If, however, Necessities exceed 50% of your monthly paycheck, you might need to relocate or reduce other expenses within that category.
How can I get started with a budget?
Start with reviewing your current expenses. You can look back to past months or start tracking as you go forward. Use transaction history in online banking to make this process easier. Also, remember to keep track of cash you use.
For the 50/20/30 rule, categorize your expenses into Necessities, Wants, and Savings. Starting with the fixed expenses can make it feel a little less overwhelming, and then it’s a matter of filling in the rest.
You can use our budget calculator to enter expenses and see how much is left over for savings.
Are there exceptions to the 50/20/30 rule?
Yes. The budget breakdown serves as a guideline, but you may need to make some adjustments to your situation. For example, you may need to spend a little more than 50% in Necessities based on the cost of living in your area. Or, factors like ongoing medical expenses could shift your budget percentages.
You can also modify the formula to meet certain financial goals. For example, if you’re paying off credit card or student loan debt. In that case you may decrease the Wants category by the amount you wish to put toward debt.
The 50/20/30 rule excels in identifying overspending while also offering flexibility. But, the best budget is one you can stick to. Try the 50/20/30 budget and see if it works for you.