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Making a budget is a crucial first step toward almost any financial goal, from gaining control of spending to paying off debt to saving up for a house.
But budgeting can feel complicated and restrictive. The 50/30/20 rule is an ideal strategy for many because it's flexible and easy to implement. Instead of requiring detailed expense tracking, it splits your budget into just three general categories: needs, wants and savings and debt repayment combined. Here's how to put the 50/30/20 rule into practice.
How the 50/30/20 Budget Rule Works
Start by figuring out your monthly after-tax income, or net income. Then divide your income into three categories, and aim to keep your spending within those guidelines. You'll spend a maximum of 50% of your take-home income on necessary expenses, a maximum of 30% on wants and 20% or more on savings and debt payments.
Here's how it works in detail.
50: Spend 50% or Less on Necessary Expenses
Limit your spending on basic expenses to half of your take-home income. Necessities include:
- Housing
- Groceries
- Child care
- Utilities
- Minimum debt payments
- Basic clothing
- Transportation
- Insurance
- Medical care
- Home and car maintenance
The 50/30/20 budget is just a recommendation; it's meant to be flexible, and to provide some structure within the real-world circumstances you live in. Child care or housing alone, for example, could take up a huge chunk of your income. If it's very difficult to spend less than 50% of your income on essentials each month, you can cut down on expenses, limit your spending in other categories or choose a different budgeting method altogether (more on that later).
Tip: Transportation expenses can include whatever you regularly pay to commute, including gas, car payments or public transit costs.
30: Spend 30% or Less on Discretionary Expenses
Next, take stock of the nice-to-haves, like:
- Restaurant meals or takeout
- Travel
- Hobbies like sports equipment, video games or musical instruments
- Media subscriptions or streaming services
- Gym memberships or fitness classes
- Nonessential clothes or tech upgrades
Plan to spend a maximum of 30% of after-tax income on things that are fun, but aren't essential.
20: Put 20% or More Toward Savings and Debt Payments
At least 20% of your net income should go toward savings—for retirement, emergencies, college for your kids or other goals—and extra payments on your debts. Investments in a brokerage account for short- or long-term wealth building would also go in this category.
Minimum debt payments, such as a monthly installment loan bill or your credit card's minimum payment, live in the "essentials" category. That's because falling behind could mean losing assets like your house or car, plus severe damage to your credit. But if you can afford to put more toward your debt to pay it off sooner, that will come out of this category.
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50/30/20 Budget Example
To see what a 50/30/20 budget might look like, say you earn $3,000 a month after taxes. Each month, you'd plan to spend no more than $1,500 on necessities and no more than $900 on items you want but don't need. You'd also put at least $600 toward a mix of savings goals—like retirement and growing your emergency fund—and extra payments on loans or credit cards to speed up debt payoff.
Learn more: Why Is Budgeting Important?
What Counts as Needs vs. Wants?
Some expenses are tricky to categorize, and whether they're a need or want can vary from person to person.
Dry cleaning, for example, may seem like a nice-to-have, but it can be a necessity if your job requires you to follow a certain dress code. Likewise, a gym membership isn't technically an essential expense. But if you know that when you're not active, it compromises your mental health and your ability to enjoy life, it's reasonable to decide it's essential.
Learn more: Budgeting for Needs vs. Wants
Pros and Cons of the 50/30/20 Budget Rule
The 50/30/20 rule has a lot of benefits, but it's not perfect. Here are the pros and cons to be aware of.
Pros
Simplicity: Unlike more prescriptive budgeting methods, you identify an overall amount you want to spend—such as half your income on necessities—rather than assigning an exact amount to more specific categories like personal care or groceries.
Allows for discretionary spending: The 50/30/20 budget recognizes that fun stuff is part of life, too. Setting aside money for things you enjoy ensures you can keep delighting in what matters to you, and makes it more likely you'll actually stick to the plan.
Helps balance out spending and saving: When you follow the 50/30/20 method, saving and paying down debt are nonnegotiable parts of your monthly outlay. That encourages you to maintain a consistent savings habit and pay down debt faster.
Cons
Not always realistic: It may be difficult, especially for those with low incomes or who live in expensive areas, to limit necessities to 50% or less of after-tax income.
Savings and debt payoff in a single category: While it's an advantage of the 50/30/20 budget that savings and debt repayment are prioritized, collapsing them into one category may not give either savings or debt payoff enough weight for those who want to focus on them.
Not simple enough for some: The 50/30/20 method still requires upfront effort to divide expenses into the three buckets. You could consider, for example, using the 80/20 rule to set aside 20% of income for savings and debt payoff and simply making sure the rest of your spending stays below the 80% threshold.
Who Should Use the 50/30/20 Budget Rule?
The 50/30/20 budget is a good option if you:
- Are new to budgeting: Since it's relatively simple and doesn't require maintenance of a big spreadsheet or app, the 50/30/20 rule is a good starter budget. You can also easily tweak it to meet your needs.
- Want a low-effort approach: The 50/30/20 method isn't as hands-off as the pay-yourself-first or 80/20 budget plans. Instead, it provides some structure that can be adjusted as needed, which is the sweet spot for many who want to gain control of their spending.
- Can (mostly) stick to the guidelines: This strategy may be a fit for you if it's not too much of a stretch to keep your needs to a maximum of 50%—or perhaps more realistically, 60%—of take-home income.
It may not be ideal if you:
- Are a freelancer or have irregular income: When your earnings fluctuate a lot from month to month, it's hard to know what 50% or 30% of your take-home income will be. You can use an average of your earnings as a baseline, and instead of the 50/30/20 plan use a budget for irregular income such as zero-based budgeting instead.
- Spend far more than half your income on basics: If you live in an expensive city, you may need to accept that housing, for example, will take up a big segment of your budget. That could make it difficult to closely follow the 50/30/20 plan, and a different budgeting strategy, such as a reverse budget, may make more sense.
How to Create a 50/30/20 Budget
Here's how to set up your own 50/30/20 budget:
- Find your after-tax income. Look at all of your income sources and come up with the total you earn each month after taxes have been deducted.
- Categorize your expenses. Pull up your bank and credit card statements and categorize your fixed and variable expenses into needs and wants. It can be helpful to glance at the past six to 12 months of transactions so you don't miss anything, like once- or twice-yearly car insurance payments.
- Add savings and debt repayment goals. Add to your list of expenses all outstanding debts and all of your saving goals, such as for retirement, a down payment or college.
- Assign each category a spending limit or minimum. Check if it's possible to stick to the traditional 50/30/20 structure, or if you'll need to adjust it to 60/20/20 or a different breakdown.
- Look for ways to cut spending. To send 20% or more of income to savings and debt payoff, you may need to reduce expenses. Don't eliminate all wants from your budget, but see if you can cancel subscriptions you don't use or switch to a new phone plan or cable package.
- Track how it's going. Every few months, check back in to see if you've been able to stick to your plan. You may decide to cut back further on spending, recategorize some expenses or change your spending limits.
Learn more: Best Budgeting Apps
Is The 50/30/20 Budget Still Realistic Today?
The cost of housing, groceries, child care, health care and other essentials has increased substantially since 2005, when Sen. Elizabeth Warren championed the 50/30/20 plan in her book "All Your Worth: The Ultimate Lifetime Money Plan," co-written with her daughter Amelia Warren Tyagi.
But in general, the 50/30/20 rule still applies. 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 lowering your 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 alternatives:
- 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.
- 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.
Frequently Asked Questions
Is the 50/30/20 Rule Good for Beginners?
The 50/30/20 rule is an ideal budget for beginners because it's easy to understand, implement and track. It doesn't require a lot of maintenance, and it's effective: By following the plan, you'll ensure your money covers all the important areas of your life, including discretionary items, savings and debt paydown.
What if My Needs Are More than 50% of My Budget?
You can still use the 50/30/20 rule if your needs are more than 50% of your budget. You don't have to hit the 50% limit exactly; you can adjust the guideline, for example, so that 60% of net income goes toward necessities, 20% goes to wants and 20% to savings and debt payments. If you spend far more than 50% of income on needs, a less structured plan, like the pay-yourself-first budget, may work better.
Is the 50/30/20 Rule Monthly or Weekly?
The 50/30/20 budget is meant to be followed monthly. That means you'll use your net monthly income as the baseline and set spending limits and saving goals on a monthly basis.
The Bottom Line
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 saving and paying down debt at the same time.