What is The 50/30/20 Budgeting Rule and How to Use It

The 50/30/20 rule (also known to as the 50/20/30 rule) is one method of budgeting that can help you keep your spending in alignment with your savings goals. Budgets should be about more than just paying your bills on time—the right budget can help you determine how much you should be spending, and on what.

The 50/30/20 rule can serve as a great tool to help you diversify your financial profile, reach dynamic savings goals, and overall financial health.

What is the 50/30/20 Budgeting Rule?

The 50/30/20 budgeting rule divides after-tax income into three different buckets:

  • Essentials (50%)
  • Wants (30%)
  • Savings (20%)

50-30-20 budgeting chart

Essentials: 50% of your income

To begin abiding by this rule, set aside no more than half of your income for the absolute necessities in your life. This might seem like a high percentage, but once you consider everything that falls into this category it begins to make a bit more sense.

Your essential expenses are those you would almost certainly have to pay, regardless of where you lived, where you worked, or what your future plans happen to include. In general, these expenses are nearly the same for everyone and include:

  • Housing
  • Food
  • Transportation costs
  • Utility bills

The percentage lets you adjust, while still maintaining a sound, balanced budget. And remember, it’s more about the total sum than individual costs. For instance, some people live in high-rent areas, yet can walk to work, while others enjoy much lower housing costs, but transportation is far more expensive.

Wants: 30% of your income

The second category, and the one that can make the most difference in your budget, is unnecessary expenses that enhance your lifestyle. Some financial experts consider this category completely optional, but in modern society, many of these so-called luxuries have taken on more of a mandatory status. It all depends on what you want out of life and what you’re willing to sacrifice.

These personal lifestyle expenses include items such as: your cable bill, cell phone bill, and trips to the coffee shop. If you travel extensively or work on-the-go, your cell phone plan is probably more of a necessity than a luxury. Other components of this category include dining out, gym memberships, and weekend trips. Only you can decide which of your expenses can be designated as “personal,” and which ones are truly necessary. 30 percent is the maximum amount you should spend on personal choices. The fewer costs you have in this category, the more progress you’ll make paying down debt and securing your future.

Savings: 20% of your income

The next step is to dedicate 20% of your take-home pay toward savings. This includes savings plans, retirement accounts, debt payments and rainy-day funds—things you should add to, but which wouldn’t endanger your life or leave you homeless if you didn’t. This category of expenses should only be paid after your essentials are already taken care of and before you even think about anything in the last category of personal spending.

Think of this as your “get ahead” category. Whereas 50 percent of your income is the goal for essentials, 20 percent—or more—should be your goal as far as obligations are concerned. You’ll pay off debt quicker and make more significant strides toward a better future by devoting as much of your income as you can to this category.

 

Establishing good habits will last a lifetime. You don’t need a high income to follow the 50/30/20 rule; anyone can do it. Since this is a percentage-based system, the same proportions apply whether you’re earning an entry-level salary and living in a studio apartment, or if you’re years into your career and about to buy your first home.

A note of caution, though: Try not to take this rule too literally. This plan is a framework for you to work within. Once you review your income and expenses and determine what’s essential and what’s not, only then you can create a budget that helps you make the most of your money. Years from now, you can still fall back on the same guidelines to help your budget evolve as your life does.

How to Budget with the 50/30/20 Rule

To make the most of this budgeting method, consider following the steps below:

Deep Dive Into Your Current Spending Habits

Before implementing a 50/30/20 budget, take a long, hard look in the mirror (or maybe your wallet, rather). We’re talking about analyzing your spending habits. Do you overspend on clothes? Shoes? Food? Drinks? Figuring out your spending habits from the very beginning will help you learn how to use a 50/30/20 budget that effectively cuts spending where you need it most.

Take a look at your bank and credit card statements over the last few months and see if you can find any common trends. If you find that you’re overspending on going out for food and drinks, come up with a plan for how you can avoid this scenario. Cook dinner at home before, have a potluck with friends, find happy hour specials around town. There are plenty of ways to budget and save money without compromising your social life.

Identify Irregular Large Ticket Expenses in the “Wants” Category

Of course, there are expenses in life that we simply can’t avoid. Maybe you need to make a repair on your vehicle, or perhaps you’re putting a down payment on a house in the next six months. Oftentimes these bills are necessary expenses, so you’ll have to factor them into your budget.

Add Up All Income

Totaling your income is an important first step when learning how to budget your money using the 50/30/20 rule, but it’s not always as simple as it sounds. Depending on your job, you might have a relatively steady paycheck or one that fluctuates from month to month. If the latter is the case, collect your paychecks from the last six months and find the average income between them.

Is the 50/30/20 Budget Right for You?

The 50/30/20 budget isn’t the only option. Other popular methods include:

  • Zero-sum: The principle of the zero-sum budget is that you must allocate each and every dollar you earn toward a specific expense, savings account, debt, or disposable income account. This style can help deter unnecessary spending because you’ll know exactly how much you have to spend on what items.
  • Envelope budgeting: Swiping your card left and right is easy—but the envelope method doesn’t let you succumb to this temptation. Rather than using your card to spend, you use a predetermined amount of cash as your spending pool, nothing more.

Choosing a budgeting style that works for you depends on a variety of factors; there’s no one-size-fits-all approach to budgeting and saving money. That said, the 50/30/20 tends to be a simple yet effective option for getting started on your budgeting journey.

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