What is the 50/30/20 Rule: A Tool for Effective Budgeting

Personal budgets are an organized way to make sure all of your financial obligations are met. They make it easier to plan for the future, spend responsibly, and stay out of debt. However, learning how to budget isn't always straightforward.

Though there are many options, a strategy that divides your income into three parts using the so-called 50/30/20 rule has become a popular choice for many people as they decide how much they should save each month.

Introduction to the 50/30/20 rule

Overview of the 50/30/20 rule

The 50/30/20 rule is a straightforward rule of thumb that involves breaking up your spending into three distinct categories: needs, wants, and savings and paying off debt. Calculated with after-tax income, each specific category is allocated to a certain percentage of your income. 

Following the rule, 50% should go toward needs, 30% toward wants, and 20% toward savings and debt. "What's nice about the system is it's simple," says Jay Zigmont, PhD, CFP, and founder of Childfree Wealth. 

Origin and popularity 

Sen. Elizabeth Warren and her daughter, Amelia Warren Tyagi, who wrote about 50/30/20 in their book published in 2005, "All Your Worth: The Ultimate Lifetime Money Plan," are widely credited for popularizing its use in personal budgeting. 

Overall, the template keeps things simple, gives a general idea of where money could go, and serves as a framework to track spending against.

"It's easy, it's well structured — because of the forced savings component — and that's why it's been popular," Frank McLaughlin, a CFP and wealth advisor at Merriman, says of the reasons it's caught on so much in the last decade and a half.

How the 50/30/20 rule works

Allocating 50% to necessities

With this system, needs are often the bare minimum for survival: food, shelter, health care, basic clothing, and other items of this nature. "I really think of that as your core cost of living," says McLaughlin. "They're those things that you could not live without." Often, it takes a critical and honest attitude toward spending to figure out what truly belongs in this category.

Following the 50/30/20 rule, no more than 50% of your after-tax income should go towards this category. If your "needs" spending is accounting for more than half of your income, the idea of the system is that you cut back or adjust your lifestyle until you're under that threshold. 

Allocating 30% to wants

Wants are things you don't need, but they make you happy. Eating out, concerts, events, leisurely shopping, home upgrades, or vacations could fall into this category. It's things you can live without, but that you'd prefer not to. Following the 50/30/20 rule, these purchases shouldn't cost more than 30% of whatever your after-tax pay is.

Quick tip: Some experts recommend keeping two checking accounts, one for bills — or needs — and one for all other spending, or your wants. This can be a simple way to keep track of how much you're spending in each category.

Allocating 20% to savings and debt repayment

The last, and smallest category, of the 50/30/20 rule is for managing debt and savings. This could mean paying down student loans, funding retirement accounts, paying off credit card debt, working toward longer-term savings goals, or building an emergency fund.

"Either way, it's increasing your net worth by either saving more or putting money toward your liabilities or areas that you owe money," McLaughlin says.

You can also use this 20% for safe investments, especially if you don't have any debt to pay off.

Benefits of using the 50/30/20 rule

Simplifying financial planning

One of the biggest benefits of the 50/30/20 rule in personal finance is that it's one of the least complicated budgeting strategies to use. While strategies like Dave Ramsey's envelope system or zero-balance budgets require you to keep track of your finances down to the dollar each month, the 50/30/20 rule lets you work on a larger scale. 

It also doesn't require you to separate your spending into lots of smaller categories, preferring instead to focus on three bigger ones. This might be helpful for people who struggle to keep track of day-to-day purchases. 

Encouraging financial discipline

At the same time, the 50/30/20 rule encourages you to limit how much money you're spending on unnecessary purchases. By knowing just how much money you have to spend on things like concerts and candles, you'll be able to better understand how each purchase fits into your greater budget and make more informed decisions on what purchases are important enough to go through with. 

It will also help you start saving for the future, whether in the form of a retirement plan, a high-yield savings account, or just paying off outstanding debts.

How to implement the 50/30/20 rule

Tracking your spending

In order to track your spending, you first need to know how much you're making. You'll want to go through your pay stubs to determine how much money you're taking home after tax each month. Part of the reason it's important to look at your pay stub, and not just the amount deposited into your account, is because you'll want to make note of any contributions that are going to a retirement plan or other savings account.

"That would be considered part of the 20% into savings, so you don't want to shortchange yourself or discredit all the work that you're doing," McLaughlin explains. 

Next, you'll need to track your monthly spending. According to McLaughlin, this is often one of the most difficult parts of the budget. Because it can be tedious, it may discourage some potential users. A budgeting app is one way to make the process simpler, but pencil and paper or personal spreadsheets can also help you keep track of your spending. 

You can also go through your bank statements at the end of the month and categorize each purchase to see how much you're spending on what.

Adjusting your budget categories

Next, you'll want to calculate 50%, 30%, and 20% of your net pay to determine how much to spend in each category. To do this, multiply your after-tax pay by 0.5, 0.3, and 0.2, respectively. "Those will give you the numbers that you can roughly try to squeeze things into for those different buckets," McLaughlin says. 

If those numbers don't work for you — for example, if you want to pay off your credit card fast, and therefore need more than 20% of your income to go to debt repayment— you can always tweak the percentages until they work for you.

Quick tip: The first month of budgeting is often the hardest. Don't get discouraged if your spending doesn't track perfectly against the 50/30/20 parameters the first time you try it. 

Challenges and solutions

Addressing common obstacles

Though the 50/30/20 rule can be a useful starting point, it's not always the best choice for everyone. For example, retirees may not be saving 20%, or any money at all, once they stop working. It could also be difficult to implement for those who experience irregular pay month to month or year to year — like contract workers or people who work mainly on commission.

"Not everyone is going to fit neatly into these buckets," McLaughlin says. 

In some circumstances, the 50/30/20 rule just may not be possible. If you make less money, housing alone could take up half of your pay. Some people have personal loans that already total more than 20% before evening thinking about savings. 

The rule also doesn't account for interest, inflation, or any other factors outside of spending categories. If you've got credit card debt with a high interest rate, more times than not it makes more sense to pay that down as quickly as possible before spending 30% of your income on wants. 

Tips for successful implementation

"It's going to work best for people that have enough money and low enough debt to make it work," says Zigmont. For people who don't have any debt or low-interest, "good" debt, the rule might make sense. It could also be a good starting template for anyone who is brand new to budgeting and looking for a simple template.

"The budget is good about getting you to actually work on a budget," Zigmont says. "If it works out that it's 60/20/20 that's fine, at least you're using a budget. That's what's important."

Alternatives to the 50/30/20 rule

There are a few alternatives to the 50/30/20 budgeting method.

If you want a similarly flexible rule, but you'd prefer that it focused more on debt, the 70/20/10 rule might be better for you. In the 70/20/10 rule, 70% of your budget goes to both wants and needs, 20% goes to savings, and 10% goes to paying back debts or donating. This rule also doesn't focus as much on defining what counts as a "want" and what counts as a "need." 

If you'd rather focus your budgeting on your financial goals, the pay yourself first system might work better for you. With this system, you start by figuring out how much money you want to save or pay off debts with each month. You then subtract that from your income for that month and use the resulting number to determine how much you have for other expenses or purchases.

If you do want a budgeting strategy that's more granular, either a traditional budget or something like the envelope system might work better for you. A traditional budget, or a zero-balance budget, asks you to have your income equal your expenses. The envelope system asks you to put paper money into envelopes corresponding with each thing you want to spend money on that month (for example, food, clothing, or rent).

50/30/2o budget FAQs

What if my expenses exceed 50% for necessities?

It's OK if your expenses exceed 50% of your income, especially if you live in a high-cost-of-living area. To help address these expenses, consider reducing variable expenses or looking for opportunities to increase your income.

Can the 50/30/20 rule work for variable incomes?

Adapting the 50/30/20 rule for variable incomes is tricky, but not impossible. If you have a variable income, base your budget on the average of your income over the past few months and adjust as necessary.

Is it OK to adjust the percentages in the 50/30/20 rule?

It is OK to adjust the percentages in the 50/30/20 rule so it fits your financial circumstances, savings goals, and values.

How do I account for debt repayment in the 50/30/20 rule?

Debt repayment is part of the last 20% of your budget, along with savings. That being said, things like minimum mortgage payments probably count as for the 50% "need," since that represents your housing costs.