What is the 50/30/20 rule?

The 50/30/20 rule can help prioritize savings by directing 50% of your take-home pay for needs, 30% for wants and 20% for savings or investments.

This budgeting approach can be effective in saving a portion of your money for the future while accounting for present expenses. We outline its advantages, steps to get started, alternative budgeting methods and how it can help you take control over your finances. 

• How to use the 50/30/20 rule in budgeting?
• What are advantages of using the 50/30/20 rule?
• What are some budgeting alternatives to the 50/30/20 rule?
• FAQs about the 50/30/20 rule

How to use the 50/30/20 rule in budgeting

To get a jump start on the 50/30/20 rule, four actionable steps include calculating how much you should be spending, comparing with your current spending, automating savings and investments and adjusting as needed.  

Step 1: Calculate how much you should be spending

Start with your take-home income and divide it out by the category percentages of needs, wants, and savings.  

If your take-home pay is $6,000 per month, you’ll find your percentages by multiplying by 50% (0.5) for needs, 30% (0.3) for wants and 20% (0.2) for savings. That works out as follows:

Net pay = $6,000

• Needs = $3,000
• Wants = $1,800
• Savings = $1,200

This is a rough estimate of how much to spend in each of the three categories, but it can be adjusted for differing life circumstances. Some examples of types of potential expenses could be: 

Needs: 50%

Budget 50% of your take-home pay for expenses that are considered essential needs. Examples include: 

• Housing
• Utilities
• Transportation
• Insurance
• Groceries
• Health care
• Childcare
• Debt repayment (minimum payment amount)

Wants: 30%

Budget approximately 30% of your take-home pay for expenses that may still be important to you but would be considered non-essential “wants.” Examples include: 

• Entertainment 
• Vacations
• Dining out
• Home and clothing
• Gym memberships
• Hobbies

Savings and investments: 20%

Budget approximately 20% of your take-home pay for savings and investments. These include:

• Retirement contributions
• Savings accounts
• Emergency fund
• Debt repayment above the minimum payment

Step 2: Compare with your current spending

To reach your goals, it’s helpful to know exactly how much you’ve been spending and in what categories. Take a look at your current spending and see where you’d want to adjust. Credit Karma’s Budget Calculator, or a similar budgeting tool, could be useful for this step. 

Step 3: Automate savings and investments

To ensure you’re meeting your 20% savings goal, set up automatic transfers to an investment or savings account. If you don’t have one, you can open one with a reputable brokerage or a beginner-friendly investing app.

Step 4: Review and adjust

Allow yourself some grace and flexibility to stick with the budgeting method through all the different seasons of your life. Compare against your savings and debt payoff goals and continue to adjust as needed. 

What are advantages of using the 50/30/20 rule?

Compared with other budgeting methods, the 50/30/20 rule offers simplified categories and tracking, separating needs from wants, freedom to spend on wants and wealth building. We’ll dive further into each below. 

• Simplified categories and tracking: Categorizing expenses into three categories is a simple way to track your spending. Other methods may have dozens of categories.   

• Separates needs from wants. The 50/30/20 rule aims to separate needs from wants. A budget skewing too far in one category may need to be adjusted.  

• Freedom to spend on wants. It may help to know you have the power in your budget to splurge freely spend on wants every now and then. This may help with sticking to a budget. 

• Builds wealth. The 20% designated for saving and investing is a true differentiator. You’ll build wealth and prepare for the future while accounting for present needs. 

What are some budgeting alternatives to the 50/30/20 rule?

The 50/30/20 rule is just one way to approach your budget. Some alternatives to the 50/30/20 rule include zero-based budgeting, the envelope method and a reverse budget.  

Zero-based budgeting

A zero-based budget accounts for every expense you have during the month. When your total expenses are subtracted from your income, you should get zero. With this method, you know exactly where every dollar is going, whether it’s for groceries or savings. 

Envelope method

The envelope budgeting method, also known as cash-stuffing, is physically budgeting by category via envelopes. If your monthly grocery budget is $600, you would place that amount in the envelope to be used throughout the month. When the next month rolls over, you would place another $600 in the envelope. 

Pay yourself first

Pay yourself first, also called reverse budgeting, is where you put aside savings or investments first, and then budget for the rest of your expenses. If your goal is to invest $1,000 every month, you would put aside that money first and then budget with the remainder. 

Next steps

The sooner you start using a budgeting method the sooner you’ll be able to take better control of your finances. Even if you don’t feel ready, the 50/30/20 tool is a simple approach to keeping your finances in check. With only three major categories to track, you don’t have to dig into the nitty-gritty as much as you would with a normal budget. 

You can always adjust the rule for your needs by changing the percentages to match your personal situation and financial goals, and if it isn’t working for you there are other budgeting options out there.