What Is the 50/30/20 Rule?

No matter your job or income, having a budget in place can provide some financial stability in times of uncertainty. The 50/30/20 rule is a budgeting method preferred by many for its simplicity and ease of use. Your monthly income is broken down into three buckets of spending. The percentages in each category can be slightly adjusted based on your income and needs. The 50/30/20 rule can be a starting point to help identify overspending and potential areas of saving.

By Mariah Flores

Budgeting is a skill everyone needs — for both professional and personal development.

As the economy and job market remain shrouded by a veil of uncertainty, with major companies announcing hiring freezes and layoffs, it’s always a good idea to learn how to maximize your income. Budgeting is a great first step. Plus, there are several methods available to suit your needs and wants.?

That said, preparing for the future and budgeting isn’t always easy or fun, leading many of us to just avoid doing so altogether.

The 50/30/20 rule is a simple approach to budgeting, especially for those who don’t have the patience or time to track their spending in great detail. I spoke with two financial experts to gain insight into whether this method is the right fit for you.

50/30/20 Rule: A Simple Formula

Created in 2005 by U.S. Sen. Elizabeth Warren (a Harvard law professor at the time) and her daughter, Amelia Warren Tyagi in their book, All Your Worth: The Ultimate Lifetime Money Plan, this budget rule has all the makings of a unique trivia night question.

The Balance writes that the budget was designed “as a rough rule of thumb for working-class families to plan their spending in order to prepare for the future and unforeseen circumstances.” It has since become a popular tool for anyone looking to master their finances, curbing overspending and under-saving.?

Simplicity is another draw to the rule, because as Derek N.H. Notman, CFP, a fintech founder on a mission to transform the financial services profession & industry with Couplr, Conneqtor, and Rethink notes, “Saving can be boring.”??

“Deep down most of us know we need to save for the future, but we dread it or put it off till another day as sometimes it can feel like an all-or-nothing proposition,” he says. “Well, the 50/30/20 rule can help with this.”

How It Works

It’s important to have money on hand in case of emergency circumstances (your rainy day funds). The 50/30/20 rule is ideal for those seeking a way to better track expenses and manage after-tax income. Budgeting can be overwhelming, so the rule only requires you to separate your money into three separate categories: needs, wants, and savings or debt.

Vivian Tu, CEO & founder of Your Rich BFF, provides a comprehensive breakdown of the budgeting strategy:?

“The 50/30/20 method is a basic budgeting strategy where you divide up after-tax income and allocate it 50% on needs, 30% on wants, and 20% to savings. The needs section covers necessities — rent, mortgage, car payments, groceries, insurance, health care, minimum debt payment, and utilities. Wants covers your Netflix subscription, going out, traveling, new bag, new phone, etc. Savings covers things like investing, Roth IRA contributions, emergency fund, and debt repayment above the minimum requirement.”

She believes that this is a budgeting strategy suited for beginners. “[T]here aren't any hard and fast guardrails (you're just trying to get close to these numbers, doesn't need to be exact) and it's simple to do.”

To calculate the dollar amount for each category, you need to know your after-tax income. Credit Karma recommends you start with the take-home pay on your paycheck, adding back any deductions that aren’t taxes, which may include things like health insurance and retirement contributions.

“Let’s say you’ve calculated your after-tax income as $6,000 per month. In this case, you’d have $3,000 for needs, $1,800 for wants, and $1,200 for savings and debt,” states the personal finance company.

You can use online budget calculators to help simplify this process, like this one from NerdWallet. “If you are a tech-savvy individual, there are some cool apps that can help you digitally do this,” says Tu. “This will save you time and effort versus breaking it out yourself in an excel sheet.”

Additionally, these percentages in each category can be slightly adjusted based on your situation. In fact, these amounts will most likely change from month to month, notes Notman. It’s all about striking the perfect balance.

“Just like we need to find work-life balance, we should also try to find balance with our money by making sure we can pay for our basic needs today while also enjoying life a bit but at the same time planning to be able to pay for it all in the future,” says Notman. “I like the 50/30/20 rule because it's a balanced and reasonable approach instead of making drastic changes which we all know are hard to stick to.”?

Is the 50/30/20 Budget Right for You?

You may start to calculate your monthly income and spending threshold for each category — seeking to strike that balance Notman mentions — only to stop short, realizing that this budget strategy isn’t the best fit for you.?

And that’s valid. Tu says that while the 50/30/20 budget works for most regular people, its usefulness can quickly change depending on your income.

“[A]s your income increases more and more, it will likely soon be less applicable. If you are able to keep lifestyle inflation at bay, your needs and wants categories should diminish significantly as a percentage of your net income, and the savings category should increase” she says.?

“The 50/30/20 method is also challenging if you don't make consistent income. Ex: you work in sales, or are a freelancer, or even a teacher who can't rely on paychecks during the summer. This budgeting method assumes your monthly incoming and outgoing cash is relatively stable.”

Along with high or unsteady income, having low income or high living costs can make this budget quite unrealistic, as reported by Forbes. “Following the bucket allocation percentages to the exact amounts might not be realistic, based on your income and how much your necessities cost.”

When budgeting, you need to look at what method makes the most sense for you — potentially using the 50/30/20 rule as a starting point to help identify areas of overspending and possible saving opportunities. No matter the budgeting method you land on (or your income), make sure it’s flexible enough to follow and stick with.

“Budgeting is important regardless of if you're living paycheck to paycheck or are very, very wealthy. Reason being: you need to know where your money is going,” says Tu.

Top Takeaways?

The 50/30/20 rule states that you break after-tax income into three categories: needs, wants and savings.

• This budgeting method was created by U.S. Sen. Elizabeth Warren and her daughter, Amelia Warren Tyagi, targeting working-class families to better plan their spending.
• If you follow the rule, you should allocate 50% of your after-tax income to needs, 30% to wants and 20% to savings.
• It’s a great rule of thumb for those looking for an easy budgeting plan but doesn’t always serve those with inconsistent incomes, along with those in areas with high living costs.