The 50/30/20 Rule
April 14, 2023
The 50/30/20 rule is a simple, practical rule of thumb for individuals who want a budget that's easy and effective. The 50/30/20 rule states that your after-tax income should be roughly divided three ways:
- 50% to needs
- 30% to wants
- 20% to long-term savings
The beauty of the rule is its simplicity. Budgeting can be complicated and stressful, but it’s something you must do your entire life. Use the 50/30/20 calculator tool below to determine how much of your monthly income should be used in each category according to the rule:
NEEDS
People define their needs in vastly different ways, but there are several categories we can all agree on, including:
- Housing: Rent, mortgage, homeowners' insurance, and property taxes
- Transportation: Car payment, gas, bus or train passes, and parking fees
- Insurance: Auto, life, homeowners, health, and renters
- Utilities: Gas, water, electricity, internet, and cell phone
- Loan Payments: Credit card debt and student loans
- Health care: Insurance premiums, deductibles, and prescriptions
Note that the necessities come in two flavors: routine expenses and predictable goals. Some things you'll pay for regularly and others require you to think ahead and anticipate future needs.
WANTS
Wants are things that you enjoy but could live without. They are subjective and personal. The 50/30/20 rule encourages you to be honest about your wants, and give yourself permission to spend some of your money on things that make your life enjoyable. Some examples include:
- Gym memberships
- Clothing
- Online subscriptions
- Cable TV
- Furniture
- Vacations
- Hobbies
- Eating out
If you squint, you'll see similarities between your wants and needs. Clothing, for example, is a necessity. However, spending extra cash for fancy clothes is more frivolous and could be determined as more of a want than a need. This doesn't mean you can't treat yourself with things that are fun or unnecessary, but you should be honest with yourself while creating a budget to balance those wants and needs.
SAVINGS
There is no financial habit as important as saving. Unsurprisingly, it's also the hardest. Saving a little with each paycheck can make life much easier when unexpected expenses occur. Whether you follow the 50/30/20 rule or not, you should make a goal to save a significant portion of your income for rainy days.
One of the great secrets to saving is finding ways to make it automatic. Don't put yourself in the position of deciding how much to save with each paycheck. Make the savings decision once, save every paycheck, and make it a lifelong habit.
You can also make saving more meaningful by giving your savings a purpose. Do you want to help pay for college? Buy a new car? Go on a dream date? Save for that purpose. This will give you a reason to save, rather than just doing it because you feel like you should.
MAKE ADJUSTMENTS
Like all budgeting methods, the 50/30/20 rule is a suggestion, and can be adjusted to fit your situation. When needs are lower, you can dedicate more to savings and wants. Just remember to adjust your budget as life changes.
