What Is the 50/30/20 Budget Rule?
5 Min Read | Published: July 5, 2023
The 50/30/20 budget approach divides monthly income into three buckets to help you right-size your spending today and build savings for tomorrow.
At-A-Glance
- The 50/30/20 budget rule allocates half of your income to necessities, 30% to desirables, and 20% to long-term savings.
- The first step in following this rule is to figure out what percentages of your income have gone to each category during the past few months.
- If you’ve been saving less than 20%, then it’s time to make some changes.
Following a budget can help you rein in your spending and work toward meeting your financial goals. The challenge is figuring out a system that you’re motivated to stick with – one that covers the necessities, leaves room for extras, and allows you to build a nest egg.
The 50/30/20 budget rule is one way to allocate your hard-earned dollars. Its premise is that you assign percentages of your monthly take-home pay to three corresponding buckets:
- 50% for needs.
- 30% for wants.
- 20% for savings.
The percentages are guardrails to help you cover your essential costs, enjoy life, and build financial security. While you don’t want to fool around with reducing the savings bucket below 20% (more on this below), it’s up to you whether to fiddle with your mix of needs and wants.
For example, if you live in a high-cost area, you may find earmarking 60% for needs (high rent or mortgage payment) and 20% for wants makes more sense. Or if you’re determined to retire early, a lifestyle that reduces your needs and wants to a total of, say, 60% would enable you to earmark 40% of your pay today for savings.
Here’s what to consider and how to divvy up your income using the 50/30/20 budget rule. (For another budgeting approach, read “What Is Zero-Based Budgeting?”)
Break Down Your Spending Into Needs, Wants, and Savings
First, let’s start with a closer look at the three budget buckets and what they represent.
Needs: These are the essential costs you must cover every month to function. This will likely include rent or mortgage, utilities, insurance premiums, groceries, and required debt payments, such as for student loans and credit cards. For the latter, it’s financially smart to pay your balance in full each month.
Wants: These are the nice-to-haves that, if you’re totally honest, you can live without. Eating out is a want; cooking at home fulfills the need for sustenance and will typically cost less. A plane ticket for a vacation is a want; some may argue a vacation is, too. Still, a staycation or a destination within driving distance can provide that much-needed break without blowing your budget.
Savings: The savings portion of your budget comprises two core elements: emergency savings and retirement savings. Building an emergency fund that covers three to six months of your living expenses offers you the financial peace of mind that you’ll be able to handle whatever costly curveballs come your way, such as an unexpected health-related expense or a layoff.
Saving for retirement so that you have enough money put away to live the life you want once you stop working is also a smart idea. Financial pros recommend saving at least 15% of your take-home pay in retirement accounts – such as a workplace 401(k) or an Individual Retirement Account (IRA) – assuming that you began doing so by age 25. If you started later, you might want to consider saving a higher percentage of your take-home pay for retirement.
Additional savings goals you may have are for a down payment for a home or a college fund for your kids. That’s all good but continue to prioritize retirement savings and build your emergency fund. Additional savings should come after fulfilling those two bedrocks of financial security.
With a better understanding of the three buckets, it’s time to pull up a few months’ worth of bank and credit card statements and group your spending accordingly.
Calculate Your Current Needs-Wants-Savings Mix
Next, add up each bucket and then divide their sums by your total monthly take-home pay. For example, let’s say your take-home pay is $5,000 and you spend $3,000 a month on needs, $1,800 on wants, and $200 goes to savings. That means your needs account for 60% ($3,000/$5,000) of your monthly cash flow, your wants consume 36% ($1,800/$5,000), and the remaining 4% ($200/$5,000) goes to savings.
Using the 50/30/20 rule, you can see spending on needs and wants is higher than they should be and at the significant expense of savings. Now comes the challenge of figuring out what you can possibly sacrifice in order to boost your monthly savings to 20% of take-home pay.
Give Your Needs a Careful Review
When determining how to reallocate your budget, it’s natural to skip right past what you spend on needs. After all, those items are non-negotiables, right? Well, if you’re serious about building financial security, you will subject your needs bucket to a clear-eyed review to see where you might be able to spend less.
For instance, let’s say you need a car to get to work. Understood. But what kind of car are you driving? New or used? Were you swayed by heated leather seats and a double-panel moonroof, or were you satisfied with the basic package? Average monthly car loan payments tend to be lower for a new car than for a used car.1 That monthly could go toward savings.
Then there are housing costs, which typically take the biggest bite of our budgets. But you do have options. If practical, would a move 15 minutes further from your favorite neighborhood cut down your monthly rent or mortgage payment? Is downsizing an option? Of course, moving has its own costs, so it’s advisable to figure those out first to make sure it’s worth the effort.
Trim Spending on Wants
The goal here isn’t to wipe out all spending on the fun stuff. We all deserve some enjoyment. But this is obviously the bucket that has the most potential for savings. A good place to start is by reviewing all of your recurring payments, such as for streaming services and other subscriptions. Each one might not be very costly, but if you were able to cut out a few or downgrade to a lower cost tier, the savings could be a nice boost for the third bucket.
And in the event you land a raise or bonus, one way to avoid “lifestyle creep” is to add most or all the extra cash for needs and savings buckets first, before adding more to your wants bucket.
The Takeaway
The 50/30/20 rule is a popular approach to budgeting that provides a blueprint for how much of your income should go to spending on needs (50%), wants (30%), and savings (20%). Committing to saving 20% can seem out of reach. But with a careful review of your needs and wants, you just might find the money you need to bolster savings for the future.
1 “Buying a New Car vs. Buying a Used Car,” Edmunds
Carla Fried is a freelance journalist who has spent her entire career specializing in personal finance. Her work has appeared in The New York Times, Money, CNBC.com, and Consumer Reports, among many other media outlets.
All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.
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