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
The 50/30/20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should be split between savings and debt repayment (20%) and everything else that you might want (30%).
What is the 50-30-20 rule for savings? ›
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
How do you calculate the 50-30-20 budget? ›
50% of your net income should go towards living expenses and essentials (Needs), 20% of your net income should go towards debt reduction and savings (Debt Reduction and Savings), and 30% of your net income should go towards discretionary spending (Wants).
What is the 50/30/20 rule and give me an example using $2500? ›
$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.
What is the 50-30-20 rule financial experts recommend monthly savings of? ›
At least 20% of your income should go towards savings. Meanwhile, another 50% (maximum) should go toward necessities, while 30% goes toward discretionary items.
What is the 50 30 20 rule money saving expert? ›
A 50 30 20 budget divides your monthly income after tax into three clear areas. 50% of your income is used for needs. 30% is spent on any wants. 20% goes towards your savings.
What is the 50 20 rule for money? ›
According to this rule, you must categorise your after-tax income into three broad categories: 50% for your needs, 30% for your wants and 20% for your savings. This way, you set aside a fixed amount from your income for each of the categories.
How do you stick to a 50 30 20 budget? ›
Here's what a budget that adheres to the 50/30/20 rule looks like:
- Spend 50% of your money on needs. ...
- Spend 30% of your money on wants. ...
- Stash 20% of your money for savings. ...
- Calculate your after-tax income. ...
- Categorize your spending for the past month. ...
- Evaluate and adjust your spending to match the 50/30/20 rule.
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.
How to live on 2000 a month? ›
Housing and Utilities
Housing is likely your biggest expense, so downsize or relocate somewhere with a lower cost of living. Opt for a small space or rental apartment rather than homeownership. Shoot for $700 or less in rent/mortgage. Utilities should run you no more than $200 in a small space if you conserve energy.
The 50-30-20 rule is intended to help individuals manage their after-tax income, primarily to have funds on hand for emergencies and savings for retirement. Every household should prioritize creating an emergency fund in case of job losses, unexpected medical expenses, or any other unforeseen monetary cost.
What is the 50 30 20 rule for donations? ›
One rule to live by when budgeting is to use 50 percent of your income on needs, 30 percent on wants, and 20 percent on saving for financial goals. The table on the next page gives you a snapshot of the type of items that you might assign to each category.
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.
Is $4000 a good savings? ›
Ready to talk to an expert? Are you approaching 30? How much money do you have saved? According to CNN Money, someone between the ages of 25 and 30, who makes around $40,000 a year, should have at least $4,000 saved.
What is the 25x savings rule? ›
AlphaCore Wealth Planner Troy Owens was recently featured in U.S. News & World Report's latest article on retirement planning and the concept of the 25x rule, which involves saving an amount equal to 25 times your projected annual retirement expenses.
What is the 40 40 20 budget rule? ›
The 40/40/20 rule comes in during the saving phase of his wealth creation formula. Cardone says that from your gross income, 40% should be set aside for taxes, 40% should be saved, and you should live off of the remaining 20%.
Does 401k count as savings in the 50/30/20 rule? ›
FAQs about 50/30/20 budgeting
In the "savings" section, you can apply some or all of the 20% you save to your 401(k), IRA or other retirement account. Usually, your employer deducts your 401(k) savings automatically from your paycheck, so you'd factor in those savings from your gross pay vs. your net pay.
What is the 20 80 rule for savings? ›
The rule requires that you divide after-tax income into two categories: savings and everything else. As long as 20% of your income is used to pay yourself first, you're free to spend the remaining 80% on needs and wants. That's it; no expense categories, no tracking your individual dollars.
