Looking for a straightforward budget that helps you save money and more effectively manage your finances? Consider the 50-30-20 budget rule. This budgeting tactic is a great first step for anyone looking to better manage their money. It keeps things simple while helping you prioritize saving and paying off debt.
Using the 50-30-20 rule can help you determine exactly where your money is going each month, which in turn helps you make changes in your spending. Here's what you need to know about the 50-30-20 budget rule.
What is the 50-30-20 budget rule?
The 50-30-20 rule is a form of budgeting that splits your monthly, after-tax income into three major categories: necessities, wants and savings.
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50% — necessities
When following the 50-30-20 budget, you'll start by allocating 50% of your income towards necessities. These are expenses that you just can't avoid, such as:
30% — wants
Let's face it, life would be miserable if you didn't have a few splurges every once in a while. Luckily, with the 50-30-20 budget, you'll allocate 30% of your take-home income towards wants. This category obviously includes all non-essential purchases, such as:
- Subscription streaming services, such as HBO Max or ESPN Plus
- Vacations
- Dining out
- Theatre, concerts, sports matches
- Leisure goods, luxury household items, apparel
20% — savings
Finally, the remaining 20% of your income should be put in savings, whether it's longer-term savings, like your retirement account, or for more short-term savings needs e.g. a rainy day fund, or to pay off any debt you have. While this section makes up the smallest portion of your overall income, it's the most important.
When adhering to the 50-30-20 rule, consider interest rates on any debt you may have. If interest rates on that debt are high, it's recommended to put all 20% towards paying off that particular debt. However, if the interest rates on your debtare fairly low, consider putting 10% towards savings and using the remaining 10% to make payments against debt.
In fact, you can search for the best savings rates below by using our tool, in partnership with Bankrate. Find the best rates from banks and credit unions that are FDIC or NCUA insured.
Example of a 50-30-20 budget
Here’s an example of budgeting using the 50-30-20 rule.
If you bring home $5,000 after-tax each month, according to the rule you'd split your income as follows:
- $2,500: 50% of your income, is allocated towards necessities —rent, utilities and groceries.
- $1,500: 30% of your income, is allocated towards things you want, whether it’s the latest iPhone or a fresh outfit.
- $1,000: 20% of your income, is set aside for saving or for paying off debts.
If you have low-interest debt, you might consider putting 10% ($500) towards an emergency fund and another 10% towards a personal loan.
Bottom line on the 50-30-20 rule
Overall, the 50-30-20 rule is a simple guideline for budgeting. However, it may not be the right fit for everyone’s financial situation. For example, you may have a lot of expenses each month that take up more than 50% of your monthly income, leaving little to allocate towards wants or savings. On the other hand, it can be a useful framework for individuals who prefer a structured, straightforward approach to budgeting.
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FAQs
Do not subtract other amounts that may be withheld or automatically deducted, like health insurance or retirement contributions. Those will become part of your budget. The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings.
What is one negative thing about the 50/30/20 rule of budgeting? ›
Some Experts Say the 50/30/20 Is Not a Good Rule at All. “This budget is restrictive and does not take into consideration your values, lifestyle and money goals. For example, 50% for needs is not enough for those in high-cost-of-living areas.
Is the 50/30/20 rule realistic? ›
The 50/30/20 rule can be a good budgeting method for some, but it may not work for your unique monthly expenses. Depending on your income and where you live, earmarking 50% of your income for your needs may not be enough.
What is the most important part of the 50 30 20 money plan? ›
Use our 50/30/20 budget calculator to estimate how you might divide your monthly income into needs, wants and savings. This will give you a big-picture view of your finances. The most important number is the smallest: the 20% dedicated to savings.
What is the 50 20 rule for money? ›
According to this rule, you must categorise your after-tax income into three broad categories: 50% for your needs, 30% for your wants and 20% for your savings. This way, you set aside a fixed amount from your income for each of the categories.
Can you live off $1000 a month after bills? ›
Living on $1,000 per month is a challenge. From the high costs of housing, transportation and food, plus trying to keep your bills to a minimum, it would be difficult for anyone living alone to make this work. But with some creativity, roommates and strategy, you might be able to pull it off.
Is $4000 a good savings? ›
Ready to talk to an expert? Are you approaching 30? How much money do you have saved? According to CNN Money, someone between the ages of 25 and 30, who makes around $40,000 a year, should have at least $4,000 saved.
What are the flaws of the 50 30 20 rule? ›
Disadvantages of the 50/30/20 Budget
Many people find it hard to allocate 20% of their income toward savings. If you live in a large metropolitan area with a high cost of living, it may be difficult or impossible to include all your needs with only 50% of your income.
How do you break down the 50 30 20 rule? ›
Key Takeaways
- The 50/30/20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do.
- The remaining half should be split between savings and debt repayment (20%) and everything else that you might want (30%).
The 30% Rule Is Outdated
To start, averages, by definition, do not take into account the huge variations in what individuals do. Second, the financial obligations of today are vastly different than they were when the 30% rule was created.
At least 20% of your income should go towards savings. Meanwhile, another 50% (maximum) should go toward necessities, while 30% goes toward discretionary items. This is called the 50/30/20 rule of thumb, and it provides a quick and easy way for you to budget your money.
How do you divide your paycheck to save money? ›
This goes back to a popular budgeting rule that's referred to as the 50-30-20 strategy, which means you allocate 50% of your paycheck toward the things you need, 30% toward the things you want and 20% toward savings and investments.
How do you stick to a 50 30 20 budget? ›
Here's what a budget that adheres to the 50/30/20 rule looks like:
- Spend 50% of your money on needs. ...
- Spend 30% of your money on wants. ...
- Stash 20% of your money for savings. ...
- Calculate your after-tax income. ...
- Categorize your spending for the past month. ...
- Evaluate and adjust your spending to match the 50/30/20 rule.
The 20/10 rule follows the logic that no more than 20% of your annual net income should be spent on consumer debt and no more than 10% of your monthly net income should be used to pay debt repayments.
What is the 5 rule in money? ›
How about this instead—the 50/15/5 rule? It's our simple guideline for saving and spending: Aim to allocate no more than 50% of take-home pay to essential expenses, save 15% of pretax income for retirement savings, and keep 5% of take-home pay for short-term savings.
What are the flaws of the 50-30-20 rule? ›
Disadvantages of the 50/30/20 Budget
Many people find it hard to allocate 20% of their income toward savings. If you live in a large metropolitan area with a high cost of living, it may be difficult or impossible to include all your needs with only 50% of your income.
What are the negative effects of budgeting? ›
Disadvantages of budgeting
- a budget could be inflexible, and not allow for unexpected circ*mstances.
- creating and monitoring a budget can be time consuming.
- budgeting could create competition and conflict between teams or departments.
- if targets are unrealistic, employees could become stressed and under pressure.
In some major cities, more than 60% of income goes to rent. Individuals have it even harder, with rents accounting for more than 70% to upwards of 100% of their income in some instances. With the basics chewing up such a large proportion of after-tax income, your savings strategy may not match the 50/30/20 rule.
