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What is the 50/30/20 Rule? (50-30-20 Budgeting Explained)

Budgeting can kind of suck (yeah I said it).

If you’re just starting out with budgeting it can be hard getting your current numbers together… Like do you know how much you’re spending in each category?

Once you have that then you need to somehow figure out how much you should be spending in each category.

Then you need to somehow fit that into some sort of budgeting process that works for you.

It can be a mess – It definitely was for me!

If you want some guidelines to follow, or you’re just looking for a simple budgeting process, you can use the 50/30/20 rule to figure out how to allocate your money.

The 50/30/20 rule isn’t a one-size-fits-all kind of thing, but it can be a great starting point for your budget.

What is the 50/30/20 rule?

An image showing the 50/30/20 rule for budgeting

The 50/30/20 rule is a guideline you can use for allocating your after-tax money.

With the 50/30/20 rule, 50% of your money will be used on needs, 30% of your money can be spent on wants, and 20% of your money should be used for saving.

Simple enough, right?

Here’s a more in-depth breakdown of each category:

50% Needs

This category is for all the things you need to live. So all the housing costs, basic groceries, transportation to get to work. Here are some examples:

  • Mortgage or Rent
  • Utilities
  • Health Care
  • Groceries
  • Transportation
  • Childcare

30% Wants

This category is all the extras that aren’t essential to living. So enjoying those nights out, gifts, new gadgets, etc.

Here are some examples of wants:

  • Cable / Internet / Cell Phone
  • Eating Out
  • Entertainment
  • Personal Care
  • Tavel

20% Savings

This category is for savings and investments, basically the things that will set you up for retirement. This includes all your savings, your IRA contributions, and your taxable investments.

This category also includes any debt payments since paying off your debt means you will lower your overall expenses and will eventually free up more money in your budget for saving and investing.

  • Savings
  • Retirement Savings
  • Credit Card Debt
  • Student Loans

Where did the 50/30/20 rule come from?

I don’t know who originally created the 50/30/20 rule, but it became popular in the early 2000’s thanks to Elizabeth Warren’s book All Your Worth: The Ultimate Lifetime Money Plan.

How to Use the 50/30/20 Rule For Your Own Budget

If you’d like to try out this budgeting method yourself, it’s pretty easy to get started.

Get Your After-Tax Income

First you need to figure out your after-tax income. If you get a regular paycheck, then this step is fairly easy. You can just use whatever you get paid each paycheck.

Budget 50% For Needs

Take your after tax income and figure out what 50% would be. This how much you can spend on your needs.

All of your basic living expenses and minimum debt payments should come out of that 50%.

Budget 30% For Wants

Next, you need to take your after-tax income and figure out what 30% would be. This is what you can use on any extras and fun stuff like entertainment, your phone, and internet.

Budget 20% For Savings and Debt Payoff

Lastly take your income and figure out what 20% would be. This amount will be used for savings and any extra debt payoff.

Make sure you’re using some of this money to put towards an emergency fund!

The 50/30/20 Rule Applied

Want to see this rule applied to real numbers?

Here you go!

Let’s use my husband’s income of $75,000 for this example. To get the after-tax income, I used the SmartAsset calculator to get an estimate.

The after-tax amount we will be using is $54,055. I will be using $4,504 for the monthly spending amount (to make it easy).

CategoryMonthly SpendingYearly Spending
Needs (50%)$2,252$27,024
Wants (30%)$1,351$16,212
Savings (20%)$900$10,800

This is what my budget would look like if I followed the 50/30/20 rule exactly.

How Does My Budget Compare to the 50/30/20 Rule?

Here’s how my real budget compares to the 50/30/20 rule:

Category50/30/20 RuleBrittney’s Budget
Needs50%55%
Wants30%25%
Savings20%20%

So I’m actually surprised to see that my budget is pretty darn close to the 50/30/20 rule!

Our savings and extra debt payments do make up about 20% of our overall budget, but we do a little bit more in the “needs” category (high housing costs), but overall not too shabby!

How do you think your budget will stack up?

Will the 50/30/20 rule work for you?

Maybe!

The 50/30/20 budgeting rule is a great place to start if you’re just getting started with budgeting and allocating your money.

For some situations (if you live in a high-cost of living area or have a lot of “needs”) the numbers just may not fit neatly into the 50/30/20 rule – and that’s perfectly fine!

You need to have a budget that works for you and your specific situation.

If the 50/30/20 isn’t for you, you can read our post about making a budget specific to your situation and income.

FAQs About The 50/30/20 Rule

What is the 50 30 20 budget rule?

The 50/30/20 budgeting rule is used to help divide your after-tax money. 50% of your money should be spent on needs, 30% of your money can be spent on wants, and the remaining 20% should be spent on savings.

Does the 50 30 20 rule include 401k?

Since the 50/30/20 budgeting rule applies to after-tax money, you do not factor in your 401k contributions (because they are taken out before taxes).

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