- Under the 50/30/20 rule, you devote 50% of your budget to needs, 30% to wants and 20% to savings and debt.
- Since this rule breaks your budget down into just three categories, you aren’t as likely to become overwhelmed.
- The 50/30/20 rule might be right for you if you’re new to budgeting and need help figuring out how much to spend on each category.
- If you want more flexibility, there are alternatives to try, like the 80/20 rule, the zero-based budget and the pay-yourself-first budget.
One of the most challenging parts of budgeting is simply getting started, but you don’t have to start from scratch with your budget. There are plenty of guidelines and frameworks to help you create a budget using strategies that have already worked for other people.
One of those strategies is the 50/30/20 rule, which outlines how you should split up your monthly budget.
Are you wondering if the 50/30/20 rule is right for your budget? Keep reading to learn what it is, how it works and whether it’s right for you.
Inside this article
What is the 50/30/20 rule?
The 50/30/20 rule is a budgeting rule of thumb that prescribes what percentage of your budget you should allocate to three different categories. Under this rule, you devote 50% of your budget to needs, 30% of your budget to wants and 20% of your budget to savings and debt payoff.
The 50/30/20 rule has been around for more than 15 years. It was first introduced by Elizabeth Warren in her book All Your Worth: The Ultimate Lifetime Money Plan. The budgeting method has become increasingly popular and more mainstream since then and is recommended by many financial experts.
This budgeting rule helps you define how much money you should devote to each budget category. You can easily look at any line item in your budget and know which category it falls into. You’ll know what changes you need to make to get your budget on track. And since this rule breaks your budget down into just three categories, you aren’t as likely to become overwhelmed.
“The result is often a budget that includes more of what you want, while still providing a cushion for emergencies and major purchases,” says Chris Panteli, founder of LifeUpswing, a financial advice website. “The key is to set realistic goals that fit your lifestyle. The key to creating a successful budget is to make sure that it works for you.”
How does a 50/30/20 budget work?
Here’s a further breakdown of the kinds of expenses that can go into each of the three categories, although what your list looks like will be individual to your own finances.
50% for Needs
Your needs make up the largest portion of your monthly budget. This category includes all necessary expenses such as:
Rent or mortgage
Minimum debt payments
In high cost of living areas, your needs may very well take up more than the recommended half of your budget. But for most people, this percentage should work. And if you’re spending more than half of your budget on needs and don’t live in a high cost of living area, you may want to reevaluate your spending to see where you could save.
20% for Savings and Paying Down Debt
Next, 20% of your budget should go toward debt and savings. The money you put toward savings can include your emergency fund, retirement contributions or any short-term financial goals you’re saving for.
Keep in mind that in the 50/30/20 budget, your minimum debt payments (the amount you must pay every month to avoid paying more interest or other penalties) don’t fall into this category—those payments are considered needs. But any extra debt payments you make each month will fall into your debt and savings category.
30% for Wants
Finally, 30% of your budget can go toward wants. Wants include anything that doesn’t fall into either of the other two categories. Common expenses in this category may include:
There are some expenses that you might not be sure if they’re wants or needs. For example, groceries are necessary expenses. You have to eat, after all. But dining out or buying the ingredients for an expensive meal may be more of a want. Expenses such as Netflix and other streaming services may seem necessary, but they really fall into the 30% of your budget that should go toward wants.
Who is the 50/30/20 rule best for?
Now that you know how the 50/30/20 rule works, you might be wondering if it’s right for your budget. The truth is that while this budgeting method is a great framework, it’s not right for everyone.
The 50/30/20 rule might be right for you if you’re new to budgeting and need a guide to help figure out how much to spend on each category. Many people may find themselves overspending in the wants category, and this budgeting rule can help to ensure you’re devoting enough money to needs, debt payoff and savings.
“There is no such thing as a budget rule that is the best for everyone,” Panteli says. “But the 50/30/20 rule certainly helps you to get a clear picture of what is really important to you and how much you should spend on your necessities and other things.”
Who may the 50/30/20 budget not work as well for?
The 50/30/20 rule is great for beginner budgeters who need a framework laid out for them. But if you find yourself in one of the situations below, it may not be as good an option for you.
People in high cost of living areas. In many parts of the country, keeping your needs below 50% may be easy. But in high cost of living areas like San Francisco or New York, plenty of residents find themselves spending 50% of their income on housing alone.
People with either very high or very low incomes. Someone with a low income may struggle to spend just 50% on needs or to put 20% toward savings each month. Meanwhile, a high earner may be able to put more than 30% of their budget toward wants.
People with a large amount of debt to pay off. Because this budgeting method has you put 20% of your budget toward debt and savings combined, there’s limited room for extra debt payments. You may choose to sacrifice some of your wants spending—or even some of your needs spending—to make additional progress on your debt repayment.
More experienced budgeters. When you’ve been budgeting for a long time and have a firm handle on it, you probably don’t need a framework to guide your budget.
The 50/30/20 budget rule is one of the most popular budgeting methods. But since it won't be right for everyone, it’s certainly not the only budgeting guideline you can use to craft your own budget.
Here are some of the other common budgeting strategies you can try.
The 80/20 Budget
Just like the 50/30/20 budget, the 80/20 rule of budgeting gives simple percentage guidelines to help you plan out your spending.
The 80/20 rule is actually very similar to the 50/30/20 rule, in that you allocate 20% of your take-home pay to savings. The major difference is that rather than breaking up the rest of the budget into smaller percentages, the rule simply has you allocate 80% of your budget to spending.
Unlike the 50/30/20 budget rule, the 80/20 rule doesn’t exactly dictate how much of your budget you spend on needs vs. wants. Some people may like the increased flexibility. However, if you struggle with overspending and boundaries in your finances, then the structure of the 50/30/20 budget may actually be more helpful.
The Zero-Based Budget
When you use a zero-based budget, you make a plan for each dollar you bring in. This budgeting plan provides far more flexibility—it doesn’t tell you what percentage you should spend on each category of your budget. It simply states that your income minus expenses should equal zero.
It’s important to note that making a plan for every dollar you earn doesn’t mean spending every dollar. Your zero-based budget should also account for savings, debt payoff and other financial goals.
The zero-based budget provides ultimate flexibility since it doesn’t dictate how much of your money goes toward each category. But for those new to budgeting, it might be too flexible.
The Pay-Yourself-First Budget
The pay-yourself-first budget is perfect for anyone working to save money or pay off debt. Using this budgeting method, you set aside a certain amount each month for your financial goal, whether it is building your emergency fund, saving for a large purchase, paying off debt or anything else.
Once you’ve paid yourself by setting aside money for your financial goals, the rest of the money can be used for your bills and spending.
The pay-yourself-first budgeting method is similar to the 80/20 budget, where it simply breaks your budget into two categories. But using the pay-yourself-first budget, there’s no predetermined percentage you put toward your financial goals. Instead, you can decide what percentage you’re comfortable with.
Like the other alternative budgeting methods we’ve discussed, the pay-yourself-first budget is far more flexible than the 50/30/20 budget rule.
Just remember, whether you’re trying the 50/30/20 rule or another budgeting framework, leave room for trial and error. The first budgeting method you try may not be the right one for you, but that doesn’t mean there isn’t a budgeting method that’s perfect for your situation.