Looking for a straightforward budget that helps you save money and more effectively manage your finances? Consider the 50-30-20 budget rule. This budgeting tactic is a great first step for anyone looking to better manage their money. It keeps things simple while helping you prioritize saving and paying off debt.
Using the 50-30-20 rule can help you determine exactly where your money is going each month, which in turn helps you make changes in your spending. Here's what you need to know about the 50-30-20 budget rule.
What is the 50-30-20 budget rule?
The 50-30-20 rule is a form of budgeting that splits your monthly, after-tax income into three major categories: necessities, wants and savings.
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50% — necessities
When following the 50-30-20 budget, you'll start by allocating 50% of your income towards necessities. These are expenses that you just can't avoid, such as:
30% — wants
Let's face it, life would be miserable if you didn't have a few splurges every once in a while. Luckily, with the 50-30-20 budget, you'll allocate 30% of your take-home income towards wants. This category obviously includes all non-essential purchases, such as:
- Subscription streaming services, such as HBO Max or ESPN Plus
- Vacations
- Dining out
- Theatre, concerts, sports matches
- Leisure goods, luxury household items, apparel
20% — savings
Finally, the remaining 20% of your income should be put in savings, whether it's longer-term savings, like your retirement account, or for more short-term savings needs e.g. a rainy day fund, or to pay off any debt you have. While this section makes up the smallest portion of your overall income, it's the most important.
When adhering to the 50-30-20 rule, consider interest rates on any debt you may have. If interest rates on that debt are high, it's recommended to put all 20% towards paying off that particular debt. However, if the interest rates on your debtare fairly low, consider putting 10% towards savings and using the remaining 10% to make payments against debt.
In fact, you can search for the best savings rates below by using our tool, in partnership with Bankrate. Find the best rates from banks and credit unions that are FDIC or NCUA insured.
Example of a 50-30-20 budget
Here’s an example of budgeting using the 50-30-20 rule.
If you bring home $5,000 after-tax each month, according to the rule you'd split your income as follows:
- $2,500: 50% of your income, is allocated towards necessities —rent, utilities and groceries.
- $1,500: 30% of your income, is allocated towards things you want, whether it’s the latest iPhone or a fresh outfit.
- $1,000: 20% of your income, is set aside for saving or for paying off debts.
If you have low-interest debt, you might consider putting 10% ($500) towards an emergency fund and another 10% towards a personal loan.
Bottom line on the 50-30-20 rule
Overall, the 50-30-20 rule is a simple guideline for budgeting. However, it may not be the right fit for everyone’s financial situation. For example, you may have a lot of expenses each month that take up more than 50% of your monthly income, leaving little to allocate towards wants or savings. On the other hand, it can be a useful framework for individuals who prefer a structured, straightforward approach to budgeting.
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FAQs
Do not subtract other amounts that may be withheld or automatically deducted, like health insurance or retirement contributions. Those will become part of your budget. The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings.
Is the 50/30/20 rule realistic? ›
The 50/30/20 rule can be a good budgeting method for some, but it may not work for your unique monthly expenses. Depending on your income and where you live, earmarking 50% of your income for your needs may not be enough.
What is one negative thing about the 50 30 20 rule of budgeting? ›
Depending on your income and expenses, the 50/30/20 rule may not be realistic for your individual financial situation. You may need to allocate a higher percentage to necessities or a lower percentage to wants in order to make ends meet. It doesn't account for irregular expenses.
Why might the 50 30 20 rule not be the best saving strategy to use? ›
Some Experts Say the 50/30/20 Is Not a Good Rule at All. “This budget is restrictive and does not take into consideration your values, lifestyle and money goals. For example, 50% for needs is not enough for those in high-cost-of-living areas.
What is the alternative to the 50 30 20 rule? ›
The 60/30/10 budgeting method says you should put 60% of your monthly income toward your needs, 30% towards your wants and 10% towards your savings. It's trending as an alternative to the longer-standing 50/30/20 method.
Is $1000 a month enough to live on after bills? ›
Bottom Line. Living on $1,000 per month is a challenge. From the high costs of housing, transportation and food, plus trying to keep your bills to a minimum, it would be difficult for anyone living alone to make this work. But with some creativity, roommates and strategy, you might be able to pull it off.
What are the flaws of the 50 30 20 rule? ›
While the 50 30 20 rule can be a useful way to manage your finances, it may not be suitable for everyone. Here are some potential disadvantages of the 50 30 20 rule: Some people might need more than 50% of their income for needs: some individuals or families may have higher essential expenses.
What are the three 3 common budgeting mistakes to avoid? ›
Here are a few to watch out for and the best ways to prevent them from derailing your financial goals.
- Budgeting Mistake #1: Not Saving for Emergencies. ...
- Budgeting Mistake #2: Overestimating How Much You Have Left to Spend. ...
- Budgeting Mistake #3: Leaving Out Money for Fun.
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings.
What is a 50/30/20 budget example? ›
Applying the 50/30/20 rule would give them a monthly budget of: 50% for mandatory expenses = $2,500. 20% to savings and debt repayment = $1,000. 30% for wants and discretionary spending = $1,500.
The "pay yourself first" budgeting method has you put a portion of your paycheck into your retirement, emergency or other goal-based savings account before you spend any of it. When you add to your savings immediately after you get paid, your monthly spending naturally adjusts to what's left.
What kind of money counts as income? ›
Taxable income includes wages, salaries, bonuses, and tips, as well as investment income and various types of unearned income.
How much money should you have left over after bills? ›
As a result, it's recommended to have at least 20 percent of your income left after paying bills, which will allow you to save for a comfortable retirement. If your employer offers matching 401(k) contributions, take advantage so you can maximize your investment dollars.
What strategy will help you save the most money? ›
Simple Strategies for Building Your Savings
Paying attention to where your money goes, creating a realistic budget, and setting short-term and long-term savings goals will help create a solid foundation. With a plan in place, getting started is as simple as opening an account and making deposits.
How much of my paycheck should I save? ›
At least 20% of your income should go towards savings. Meanwhile, another 50% (maximum) should go toward necessities, while 30% goes toward discretionary items. This is called the 50/30/20 rule of thumb, and it provides a quick and easy way for you to budget your money.
Is the 50/30/20 rule still valid? ›
Yes, the 50/30/20 rule can be used to save for long-term goals. Allocate a portion of the 20% to savings specifically for your long-term goals, such as a down payment on a house, education funds, or investments. The rule is intentionally meant to bring focus to savings.
Is saving 20% of income realistic? ›
The 20% rule is a good general guide, but it isn't the right fit for everyone. Some people can save above that rate, while others merely struggle to make ends meet. “Some people pay their rent and they have nothing left.
Is the 30% rule outdated? ›
1. The 30% Rule Is Outdated. The 30% Rule has roots in 1969 public housing regulations, which capped public housing rent at 25% of a tenant's annual income (it inched up to 30% in the early 1980s).
Is 50/30/20 gross or net? ›
Taxes are typically excluded from the calculation of the 50%, 30%, 20% rule since it focuses on allocating income after taxes. You should consider your after-tax income when applying the rule. If you do decide to factor in taxes, be mindful to use gross income and appropriately forecast what your taxes will be.
