How to Budget Using the 50/30/20 Rule

young couple sitting on the floor going over finances

The 50/30/20 rule is a budgeting strategy that offers a fairly simple way to allocate your income so you can live within your means and achieve your financial goals. Using this method, 50% of your budget goes to pay for necessities, 30% or less to discretionary items, and 20% or more to savings and debt payments.

Making a budget is an important step in gaining control of spending and paying off debt. But when you're new to budgeting, it can feel intimidating and restrictive. The 50/30/20 rule can be a smart first method to try because it's flexible and comparatively easy to implement.

Here's what the 50/30/20 rule recommends, and how to put it into practice.

How to Budget Using the 50/30/20 Rule

The initial step when using any budgeting strategy is to understand how much you're earning. Take a look at your paychecks and bank account statements for the past three months and identify your average amount of after-tax income per month.

Next, you'll allocate that money in the following way:

  • Necessities: 50% of income. Ideally, you'll spend a maximum of half your monthly income on essential expenses like rent or mortgage payments, groceries, utility bills and minimum debt payments to keep your accounts in good standing.
  • Discretionary items: 30% or less of income. If the prior category is "needs," this is "wants." Perhaps you have a Netflix subscription, you go to concerts often or you like to travel. These expenses enrich your life, but they're not strictly necessary. Aim to spend, at most, 30% of your income on discretionary items and experiences.
  • Savings and debt payments: 20% or more of income. This category includes savings for retirement, emergencies and specific medium-term goals, such as buying a home. It also includes debt payments beyond your minimum monthly bill. If you need to contribute more than 20% of your income to savings and debt, it's best to pull from the discretionary spending category.

To figure out how much to save for each goal, some rules of thumb may help. Experts recommend saving 10% to 15% of your pretax income for retirement, for instance—and at least saving up to any employer match your company 401(k) plan provides. For emergencies, experts also suggest keeping three to six months' worth of expenses in a savings account you can easily access. It's OK if you can only set aside $25 or $50 per month for emergencies to start, as long as you save regularly.

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How the 50/30/20 Rule Can Help You Pay Off Debt

In addition to helping you save more, the 50/30/20 rule can give you a framework to allocate more money toward getting out of debt.

As part of the "savings and debt payments" category, you'll pay extra beyond the minimum debt payment required so you can apply more of your money toward principal balances. Using the 50/30/20 rule, identify how much extra you can comfortably pay while addressing other priorities, too.

For instance, say you earn $2,500 per month after taxes. You'll aim to spend no more than $1,250 on necessities and $750 on wants, leaving $500 for savings and debt payments. If you have a credit card balance of $2,000, you may decide to focus more energy on debt payoff this year. So perhaps you'll limit your wants to $500 per month and put the extra $250 toward credit card bills instead, giving you eight months to pay off your balance. The other $500 in the savings category can be allocated to retirement and emergency savings accounts.

In general, it's best to attack high interest credit card debt first, then move on to the balance with the next-highest interest rate. You'll save the most money in interest that way.

What Are Alternatives to the 50/30/20 Rule?

The 50/30/20 rule isn't for everyone, and it's worth experimenting with different approaches to see what sticks. Here are some alternative budgeting strategies:

  • Zero-based budgeting: With this approach, you'll assign a function to each dollar you earn. That means you'll create many more categories than the three used in the 50/30/20 rule. For example, you might use "dining out," "personal care" and "clothing." If you earn $2,500 per month, you'll make a list of all your expenses, savings goals and debts, and ensure that you use your entire $2,500 (without going over). This method is best for people who won't feel overwhelmed by the record-keeping required, and whose income is relatively stable month to month.
  • Envelope system: Another option is to set aside money for each of your categories in cash—in envelopes labeled for each expense—which limits your spending to the amount you've identified. This requires a high level of organization, and isn't always realistic if you pay certain bills online or by credit card.
  • Multiple-account budget: You can also use your bank account to do the budgeting for you. This means creating multiple accounts—which is particularly easy at online banks—and giving them jobs, similar to the categories in the 50/30/20 rule. One account could be for necessities, like housing payments and utility bills; another account for savings; and another for fun stuff. You'll set up regular transfers from your main checking account to your other accounts so you can save and budget without thinking about it.

A Flexible Method, but One of Many

While the 50/30/20 rule is a reasonable starter budget, you might find that you prefer one that's more or less stringent. They key is to budget consistently, which will help you achieve savings and debt payoff goals while keeping spending in check. The ideal budget isn't one that others use, or that sounds good on paper; it's one that you can stick to and maybe even enjoy.