What is the 50/30/20 rule budget?

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In a Nutshell

The 50/30/20 rule budget is a simple way to budget that doesn’t involve detailed budgeting categories. Instead, you spend 50% of your after-tax pay on needs, 30% on wants, and 20% on savings or paying off debt.
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The 50/30/20 rule budget can be a simple way to track and manage your expenses. This allows you to focus on the big picture of your financial goals.

The budget divides your spending into three main categories: needs, wants, and savings or debt.

How to use the 50/30/20 rule budget

To start, you’ll need to calculate your after-tax income. Locate your take-home pay on your paystub and add back any deductions that aren’t taxes. These items may include things like health insurance and retirement contributions.

Now that we know what income you’re working with, you’ll want to figure out how much money you can allocate to your needs, wants, and savings or debt.

Needs, wants and savings or debt

Needs are must-have expenses. These include: housing, utilities, transportation and health care costs. Remember to also account for at least the minimum payments on your debts and the bare minimum of basic clothing and living supplies.

Wants are nice-to-have but not critical expenses. These include: dining out, alcohol, cable TV, internet, shopping trips, vacations, memberships, subscriptions, gifts, entertainment and other luxuries.

It’s easy to confuse many wants as needs. A simple way to determine if something is a need or a want is to ask yourself if you could live without it. If you could, it’s a want, not a need.

Savings or debt are funds you set aside for your future or to pay off debt faster than required. You can use this money to build an emergency fund, save for a down payment on a home, invest for retirement or chip away at your student loan debt or credit card at a faster clip. Make sure to always make the minimum payments on all of your credit card and loan payments before allocating any additional funds to paying down your debt.

The 50/30/20 budget rule in action

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.

Now that you know how much you can spend in each category using the 50/30/20 rule budget, the question is which expenses go in each category. Use our general guidelines above to help you decide.

Is the 50/30/20 rule budget good for me?

Whether the budget is right for you depends on your specific circumstances.

Having just three categories to track might help you focus on fine-tuning your finances instead of getting bogged down in the process of categorizing individual expenses. On the other hand, the lack of structure could make it harder to find ways to improve your spending habits. Ultimately, you need to decide whether a budgeting system that’s less detailed or more highly detailed will be best for you.

Another potential issue with the 50/30/20 rule budget is the breakdown of money allocated to needs, wants, and savings or debt. Depending on your income and where you live, 50% may not be a large enough percentage to cover your needs.

For instance, people who live in areas with a high cost of living may have to put a large part of their income toward housing, making it almost impossible for them to keep their needs under 50% of after-tax pay.

Finally, some critics of the plan say the 50/30/20 rule budget doesn’t work well for higher-income earners, because it calls for too much spending on wants versus needs or savings and debt.

What’s next

If you don’t like detailed budgeting, the 50/30/20 rule budget is a simple approach to keeping your finances in check.

Unfortunately, the 50/30/20 rule won’t work for everyone because of individual circumstances. But keep in mind that you can adjust the rule for your particular needs by changing the percentages to match your personal situation and financial goals. If that doesn’t work, there are plenty of other budgets you can try, too.

About the author: Lance Cothern is a freelance writer specializing in personal finance. His work has appeared on Business Insider, USA Today.com and his website, MoneyManifesto.com. Lance holds a Bachelor of Business Administration in … Read more.