How the 50/30/20 Rule of Thumb Works for Budgeting

By Jackie Beck   Updated 05/05/2021 at 8:16 am

Wouldn’t it be nice if you could budget without a lot of fuss? The 50/30/20 rule of thumb can help you do exactly that.

Using the rule helps you to quickly see both where you stand and where you may need to adjust. It’s an easy way to get a big-picture view.

What is the 50/30/20 Rule of Thumb?

The 50/30/20 rule is a simple way of budgeting. To use it, you put 50% of your after-tax income toward needs (aka must-haves), 30% to wants, and 20% to savings (and debt). Like all rules of thumb, it acts as a broad guideline that works for many people.

It was created / made popular by Elizabeth Warren (yes, that Elizabeth Warren) and Amelia Warren Tyagi. They call it the Balanced Money Formula in their book, All Your Worth.

Warren & Tyagi point out that comparing your spending to the rule “helps you flag when something is wrong, and it shows you where you need to take a closer look at your money choices.”

How Does the 50/30/20 Rule Work for Budgeting?

The idea is simple. You split your budget into the three parts, and you stick with those 3 chunks to keep your money life balanced.

So with the 50/30/20 rule, your budget looks like this:

Pie chart example of a 50/30/20 rule budget showing 50% needs, 30% wants, 20% savings

Keep a firm lid on the wants. Don’t let your spending on wants creep over 30%. And if it already IS over 30%, cut some items out of that category. (But don’t cut everything out — you need to have some fun money!)

Don’t skimp on the 20% savings either. If you have debt, with this method paying it back comes out of the 20%. (With the idea being that you pay it off and don’t add more.)

Needs make up the rest. If you’re too heavy on needs right now, make changes over time. Do this until your spending is in balance and needs make up no more than 50%.

How to Start Using the 50/30/20 Rule

To start using it, you’ll need to know what your take home pay is. Once you find that, you can type your take home pay into the 50/30/20 calculator below to find your target numbers:

 

50/30/20 Calculator

Take Home:  
50% Needs:
30% Wants:
20% Savings:
 

(You can also multiply your take home pay by .5 to get your 50%, by .3 to get the 30%, and by .2 to get 20%.)

Here’s a quick 50/30/20 plan example. If you bring home $2,126 a month after taxes, your 50/30/20 budget will look like this:

  • 50% Needs is $1,063
  • 30% Wants is $637.80
  • 20% Savings is $425.20

Figure out your monthly after-tax dollar amounts and write them down. Then take a look at your current spending, and split it into 3 chunks.

Start by Identifying Your Needs

Total up how much you spend on everything that’s a need. Needs are defined as bills you must pay for no matter what. Must-haves, in other words. So that’s things like groceries, housing, utilities, transportation, etc. They are the things you need to live your daily life.

Why 50% to needs? Only having half your income go to must-haves is the point. It allows you to stretch your money longer if life goes wrong. (Or maybe I should say when things go wrong in life, because everyone experiences emergencies.) It reduces stress, and just makes life easier in general. It lets you be flexible.

So add up whatever you’re spending in this area and make a note of it.

Then Identify Your Wants

Next it’s time to see how much you’re spending on wants. Wants are almost everything else, and you can do anything at all with the money in your wants category.

You can travel, pay for new clothes, or go out to eat. You can donate to your favorite animal shelter, fix up your backyard, or sign up for all the streaming channels. It’s up to you, as long as your wants category stays at 30% or less.

Again, add up what you’re spending right now on wants and make a note of it.

(If you want to make sure you don’t overlook common needs or wants, glance over this budget categories list for ideas.)

Tackle Savings

Savings is the third (20%) part of the 50/30/20 rule. The goal is to save and invest 20% of what you make, but at the start it also includes some debt.

Which debts go in this part of the budget? Usually debts that aren’t your house or car. For example, if you have payday loans, credit card debt, or old medical debt, you’ll pay those off out of this part.

Just keep in mind that paying them off is the key part. They should not be an ongoing part of the savings chunk, because you do need to really save and invest too. So eventually that’s what your 20% will be.

Review Your Numbers and Compare

Finally, review your spending totals for needs & wants. Then compare them with your target totals. Are your needs 50% or less of your take home pay? Are your wants 30% or less?

If so, you’re in good shape. You can keep doing what you’re doing, and check in regularly to be sure you stay on track. To make things easy, automate your savings and needs as much as you can.

If not, look at where you’re over or under. Are you spending too much on needs or wants? You’ll need to adjust.

How to Adjust If Your 50/30/20 Budget is Out of Whack

If you’re spending too much on needs, first check to see if you put things on the list that aren’t really needs. (Even though you like having them in your life.)

For example, putting your kids in after school sports or driving a brand new luxury car are not must-haves. Those are wants instead. Move any spending that isn’t a true need to wants.

If all of the things in your needs list really are true needs, but they are more than 50%, you may have to get creative. See if you can find ways to make more money and to pay less for those needs. That may not be fun, but it will help in the long run.

For example, if housing alone takes up 50% of your take-home pay, that makes it hard for you. But you could try:

  • moving to a lower cost of living area
  • moving to cheaper housing where you already are
  • getting roommates (or more roommates)
  • renting out a room by the night on AirBnB to increase your income
  • doing a side hustle
  • having family move in with you
  • moving in with family
  • seeing if you qualify for any housing help
  • etc

If no one thing is too high, pick several to get creative with. But do change something, even if you don’t want to.

If you’re spending too much on wants and not sending enough to savings, it’s easier. Cut back on the wants so you can balance things out by sending more to savings (and debt, if you have it.)

If you’re sending too much to savings, make sure you are still having fun. Or if savings is too high because it’s really debt, work on knocking those debts out one at a time with the debt snowball.

Who is the 50/30/20 Rule / Balanced Money Formula Good For?

If you’re using it to check if your money is not too heavy on the needs, it’s good for anyone. Using it as a check in now and then can help you keep an eye on things.

If you’re using the 50/30/20 rule to budget, it’s best for people who don’t budgeting or who haven’t budgeted before. People who want something they can easily stick with without feeling deprived.

But you still need to be willing to take a look at your spending and adjust if it gets off balance. Here’s an easy way to track your spending. Plus, it will really help — not just give you info.

Who Should Use a Different Budgeting Method?

If you prefer to keep close tabs on your money, you will probably be better off with a zero-based budget. (Or some other method plus this one.)

Why? Because the 50/30/20 rule is more about capping your spending in broad areas. It’s not about paying close attention to what you are spending on.

The biggest flaw with the 50/30/20 rule is that it IS a rule of thumb. It can work in many cases, but not all of them.

The Bottom Line

In summary, the 50/30/20 rule can help you budget without a lot of fuss. Putting 50% to needs, 30% to wants, and 20% to savings and debt is an easy way to manage your money.

This balanced money formula helps you keep spending from getting out of whack, keep debt under control, and build a safety net. And those are all great things.

How to budget with the 50/30/20 rule

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