How the 50/30/20 Budget Works

Do you need a new and more organized way of budgeting? The 50/30/20 budget might be exactly what you're looking for! It’s an easy budgeting strategy that divides your after-tax income into needs, wants, and savings. 

Whether you’re new to budgeting or looking for a simplified way to manage your household finances, this method can help you stay on track and save money. 

“The 50/30/20 budget is an excellent way to help you get a clearer picture of your finances.”

What is the 50/30/20 rule? 

The 50/30/20 rule is an easy budgeting concept that involves categorizing your household finances into the essentials you need, the things you want, and your savings and debt-reduction goals. It's a great way to give all your money a designated place to go. 

Along with this, the 50/30/20 budget gets broken up by percentages. You’ll put 50% towards your needs, 30% towards your wants, and 20% toward your savings. Hence, the budget’s name. 

Needs: 50% 

Household needs make up the most considerable portion of the 50/30/20 budgeting rule. 

Needs are categorized as essential purchases necessary to live. Everyone must spend money on these basic expenses regardless of their job, income, family size, or location. Some needs include: 

• Groceries 
• Transportation costs 
• Housing 
• Healthcare 
• Utilities 

You should also include childcare costs, education costs, and minimum debt payments in this category. In other words, anything you and your family need to sustain daily life goes in the 50% category. 

Wants: 30% 

Under the 50/30/20 budget rule, “wants” account for 30% of your after-tax income. As you’ve probably guessed, these are items or experiences you don’t necessarily need to live. You might put things like restaurant dinners, weekend trips, shopping sprees, and other similar things in this category. 

• Entertainment expenses always fall into the “wants” category. Gaming subscriptions, streaming services, concert tickets, phone apps, and hobbies all fall under the entertainment umbrella. 
• Non-essential purchases, such as clothing, electronics, and accessories, are also considered “wants.” They fall into this category because you can typically hold off on these purchases until you have the money saved and available. They aren’t considered necessities. 

It’s understandable that the lines can get blurred between needs and wants. The key to separating them is understanding if there are alternatives. There aren’t alternatives for necessities, as you can’t skip buying groceries or paying bills. There are, however, typically other options when it comes to things you want. 

Savings: 20% 

Following the 50/30/20 rule, 20% of your income will go to savings. This includes your retirement plan, savings account, and emergency fund. 

Even though minimum monthly payments are considered “needs,” debt repayments can be included in the “savings” category. So, if you have student loans, personal loans, or other forms of debt, you can put it in the 20% savings section. 

You can also include paying extra on debts in this category. Let’s say your monthly car payment is $400, which you categorize as a “need” for budgeting purposes. However, you’ve been making $600 payments to pay down the balance faster. In this scenario, $200 of that payment should be included in the “savings” category. 

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Benefits of the 50/30/20 budget rule 

Here are some advantages of using the 50/30/20 budget: 

• Financial clarity: The 50/30/20 budget is an excellent way to help you get a clearer picture of your finances. You’ll always know where you stand financially, as every dollar will have a designated category. You'll also improve your financial awareness and be able to decide where you may need improvement when it comes to spending. 
• Easy to use: This budget is straightforward to implement. By focusing on just three categories, it reduces the complexity of managing finances. There is no need for detailed and confusing spreadsheets — this method gives you a clear guide to assess and adjust your spending. 
• Highly versatile: Along with this comes plenty of flexibility. You have an entire 30% of your after-tax income to spend on things that you want. 
• Adjustable: If you see that you aren’t spending 30% on your wants, you can then adjust the percentages as needed and move that money somewhere else. It’s important to remember that this budget is like a wireframe rather than a strict rule. 
• Emphasizes savings: The 50/30/20 budget rule puts plenty of emphasis on saving. Even though saving makes up just 20% of the 50/30/20 rule, it’s arguably the top priority because you’re setting money aside for it before you can spend on wants and needs. 
• Good for emergencies: In addition to traditional savings and retirement accounts, the 50/30/20 system also prioritizes building an emergency fund. That way, you're less likely to blow your budget when you have unexpected expenses. 

Getting started with a 50/30/20 budget rule 

In theory, the 50/30/20 rule is simple, but it can take some practice to get used to. There are a few steps you can take to take to get started. 

1. Calculate your income 

The first thing you need to do is figure out your total monthly income after taxes. You should count your regular income and any side gigs you may have into this total. Include any retirement deposits too as you’ll include these in your savings bucket. 

Since it helps to look at specific 50/30/20 rule examples, let’s say you take home $1,500 every two weeks, which comes out to $3,000 per month. In addition, you have $200 automatically deposited into your 401(k) each month. This brings your monthly total to $3,200. 

2. Take a look at your recent spending habits 

Understanding your current spending habits can help you develop a realistic 50/30/20 budget and determine which expenses can be cut or reduced. 

Maybe you’re buying takeout every day at work for $15 per purchase. That comes out to $75 per week! If you make your lunches at home, that $75 can go somewhere else. 

3. Categorize your expenses 

After taking stock of your spending habits, categorize every expense into the “needs,” “wants,” and “savings” buckets. It can be helpful to physically write and list everything out. 

4. Stick to the 50/30/20 budget and adjust as needed 

Once you’ve categorized your expenses, you can calculate how much you can allot for each. Working with the above example of $3,200 a month, the 50/30/20 budget would be: 

• Needs: $1,600 
• Wants: $960 
• Savings: $640 

With rising food costs, $1,600 a month may not seem like enough to cover groceries plus gas and utilities. But remember, you still have 30% of your monthly income budgeted for “wants,” allowing you to move money around as needed. 

➢RELATED: Download our FREE budget tracker

Is the 50/30/20 budget right for me? 

If you’re looking for a simple, flexible budget, the 50/30/20 rule can be a great option. It’s an easy-to-follow budgeting method that doesn’t feel restrictive, organizes your finances, and helps reduce non-essential spending. 

But the 50/30/20 budget rule isn’t for everyone, such as low-income earners, those with high housing costs, or those who want to focus on debt management. You’ll need to sit down and take a close look at your income and spending habits to determine if this is the best budget for your household. 

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