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The 50/30/20 rule is a budgeting strategy that allocates your income into three distinct categories: 50% for needs, 30% for wants and 20% for savings and debt payoff.
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 is a solid first method to try because it's flexible and easy to implement.
Here's how to put the 50/30/20 rule into practice.
What Is the 50/30/20 Rule?
When you budget according to the 50/30/20 rule, the first step is to identify your monthly after-tax income, also called net income. Then give each dollar a role. Split your income into three categories, which will give you an upper limit for how much to spend each month. Ideally, you'll spend 50% or less of your income on necessities, 30% or less on items you want but don't need and 20% or more on savings and debt payments.
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Here's how those categories break down:
Needs are the expenses you truly can't operate without. They include:
- Rent or mortgage payments
- Transportation, such as gas or public transit tickets
- Diapers, formula and other child care expenses
- Insurance payments
- Minimum debt payments
These are the baseline expenses you would need to figure out how to cover if you suddenly lost your job. If you're not sure whether an item is a necessity or a want, consider whether you'd use your emergency fund to pay for it.
These are expenses that are important for living a full and satisfying life, but aren't absolutely essential. They include:
- Entertainment, like movies, streaming services and concert tickets
- Technology beyond a cellphone that meets your needs, such as a tablet or video game console
- Shoes, clothes and home items
- Takeout and restaurant meals
- Personal care, like haircuts and massages
20%: Savings and Debt
At least 20% of your income will go toward short-, medium- and long-term savings, plus extra payments on any debt if you have it. That includes:
- Retirement, such as contributions to an IRA or 401(k)
- Emergency savings
- Savings for specific medium-term goals, such as buying a home
- Debt payments beyond your minimum monthly bill; for example, paying more than the minimum on credit cards or student loans
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 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.
Benefits of the 50/30/20 Rule
Unlike budgeting methods such as the envelope system or zero-based budgeting, the 50/30/20 method doesn't require too much ongoing effort to maintain.
It also gives you a straightforward way to see if you're overspending in any categories, and a way to correct it. If, for example, your savings and debt repayment category takes up 30% of your after-tax income due to your car payment, you can consider spending only 10% on wants for a while until your car is paid off. Or, if your wants make up 40% of your income, you can cut back on your spending in areas such as streaming subscriptions until you hit the 30% level.
If you want to create a budget that doesn't require an elaborate spreadsheet or software to keep track of it, the 50/30/20 rule may be for you.
Drawbacks of the 50/30/20 Rule
Some budgeters might prefer a more defined system that will make them feel motivated to follow specific rules. Certain budgeting apps, for example, let you track every dollar you spend and ensure it fits into a specific subcategory. The 50/30/20 rule requires candor and self-motivation to properly categorize each expense and to follow through on its guidelines.
Another issue is the feasibility of the system. Keeping necessities to 50% or less of income can be very difficult if you live in an expensive area and already spend a big portion of your earnings on rent or a mortgage.
How to Follow the 50/30/20 Rule
To best use the 50/30/20 rule, balance your current income and expenses with your short- and long-term goals. Let's 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 building retirement and emergency funds.
Does the 50/30/20 Rule Still Work?
The 50/30/20 rule is a worthwhile place to start when budgeting, but for some, it can be unrealistic. For example, according to Moody's Analytics, U.S. renters paid an average of 30% of their income on housing in Q4 2022. That doesn't leave much room for other necessities if your budget encourages you to limit total essential expenses to 50% of income.
But in general, the 50/30/20 rule still applies in today's economy. That's because it offers a broad view of your finances that encourages you to make changes when possible. If you spend 30% of your income on rent, that may bring your needs category to 60% of income. But you could decide to cut back on wants in order to bring your budget into balance, or to look for ways to limit spending on other needs—like negotiating down insurance payments—to make more room.
Alternatives to the 50/30/20 Rule
The 50/30/20 rule isn't for everyone, and it's worth experimenting with different budget plans to see what sticks. Here are some alternative 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. Make a list of all your expenses, savings goals and debts, and ensure that you split your entire post-tax income into these categories. This method is best for people who won't feel overwhelmed by the record-keeping required, and whose income is stable month to month.
- Envelope system: Another option is to set aside a certain amount of cash for each of your categories in labeled envelopes—and limit your spending to that amount. This requires a lot of organization, and isn't realistic for bills you pay online or by credit card. Another downside is the need to keep a stockpile of cash that can get lost or stolen.
- 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—for certain expenses, similar to the categories in the 50/30/20 rule. You'll set up regular transfers from your main checking account to your other accounts so you can set spending limits without thinking about it.
- Pay-yourself-first budget: With this approach, you'll set up an automatic transfer from your checking account to your savings account(s) right after getting paid. That way, you'll know your long-term savings goals are covered, and you can spend the rest of your income on needs and wants without delineating exactly where the money goes. As long as you don't overdraw your account, you're in the clear.
Building a Budget That Fits Your Life
A budget should make you feel empowered and in control. The 50/30/20 rule can do that by providing a flexible framework that can shift with your circumstances. With some initial categorizing and occasional check-ins on how it's working for you, this budget can give you structure with minimal fuss—and a way to ensure you're also saving and paying down debt on your own timeline.