The 50/30/20 budgeting rule provides a way of easily separating your after-tax income into three categories: 50% for needs, 30% for wants, and 20% for savings and debt repayment. It relieves the burden of tracking every expense, instead, it allows for prioritizing necessary expenses, limited discretionary spending, and future savings. This approach explains what is the 50/30/20 budgeting rule in a simple and practical way.
The simplicity and flexibility of the 50/30/20 rule make it an appealing budgeting framework for novices. First introduced and explained by Elizabeth Warren and Amelia Warren Tyagi in All Your Worth: The Ultimate Lifetime Money Plan (2005), the rule’s widespread popularity has been justified.
How the 50/30/20 Rule Breaks Down
The rule organizes your monthly take-home income into three broad categories. Each category serves a different purpose, helping you meet current obligations while preparing for future financial needs.
50% – Needs
The first half of your after-tax income is to cover essential expenses like rent or mortgage payments, property taxes and homeowners association fees, utilities (electricity, water, gas), and groceries. These are costs you must pay to maintain your basic standard of living and financial obligations. Missing these payments could affect your health, safety, employment, or credit.
A good way to figure out if a cost is a necessity is to see if you can live/work without it. If the answer is no, it is probably a need.
You should keep in mind that a “need” is not always the most expensive choice. Like, having transportation may be important, but a fancy car payment may be more than the required cost.
30% – Wants
The next 30% of your income is reserved for non-essential spending that improves your lifestyle but isn’t required for everyday living.
Typical wants include:
- Dining out
- Coffee shop purchases
- Streaming subscriptions
- Movie tickets
- Concerts and sporting events
- Vacations
- Gym memberships
Usually, when you buy things that may enhance your quality of life, you can put them off or skip them when things change financially.
Sometimes, people don’t realize that some mandatory things may not need spending money. For example, your work needs the internet, but it doesn’t mean you pay extra for premium entertainment channels, that’s generally considered a want.
20% – Savings & Debt Repayment
The last 20% works to improve your financial future. This section works to build wealth, improve financial security, and accelerate debt repayment. Whether you have a personal loan or any other outstanding balance, this category helps you pay it off faster.
It is vital to recognize the difference between basic debt repayments, which will go under ‘needs,’ versus additional debt repayments, which will go in the 20% because they help to quickly decrease your debt and enhance your financial health.
This section prioritizes building an emergency fund first. After you have built this, you can direct more to your retirement accounts, investing, and other savings goals.
Examples include:
- Emergency fund contributions
- Retirement savings
- Investment accounts
- College savings
- Saving for a home down payment
- Saving for a vehicle
- Extra mortgage payments
50/30/20 Rule Example Budget
As percentage remains constant regardless of income, it makes it easy to apply the rule. You can apply this rule whether you’re just starting your career or managing a larger household budget.
Example: Single Earner
| Category | Monthly Amount (Income: $5,000) |
| Needs | $2,500 |
| Wants | $1,500 |
| Savings & Debt Repayment | $1,000 |
In the example of a working adult, the savings part of the budget could be made up of their emergency fund and retirement and investment accounts. While the 30% discretionary spending would be the max spending some adult would do.
Example: Family Budget
| Category | Monthly Amount (Income: $7,000) |
| Needs | $3500 |
| Wants | $2100 |
| Savings & Debt Repayment | $1400 |
If you are budgeting for a family, allocate the needs category to expenses such as childcare, insurance, food, housing, and transportation. Use the savings category for retirement, an emergency fund, and your children’s education.
Quick Reference Budget
| Monthly After-Tax Income | Needs (50%) | Wants (30%) | Savings (20%) |
| $3,000 | $1,500 | $900 | $600 |
| $5,000 | $2,500 | $1,500 | $1000 |
| $7,000 | $3,500 | $2,100 | $1400 |
What If You Can’t Follow the 50 30 20 Rule Right Away?
If the budget feels stretched, hitting your target percentages may seem difficult instead make gradual improvements. Gradual changes to your discretionary spending, your income, or your refinancing options will help you get closer to the target allocation suggested.
If you suffer cash flow problems at work between paydays, what do you do? Instead of taking out a loan, you may want to try out earned wage access (EWA). EWA works by giving qualifying employees the option to withdraw a portion of their wages that they have already earned ahead of the scheduled payday. Understanding smart money habits — like what is the 50/30/20 budgeting rule — can also help you plan better so these cash crunches happen less often.
Taking out no check installment loans is another option if EWA is not available. Unlike traditional loans, no check installment loans can be paid back over a series of installments instead of one lump-sum payment. Determine the cost and your ability to make the monthly payment before you take out a line of credit to help ensure the expense does not put you further in the hole.
