If you’re trying to take control of your finances, but aren’t sure where to start, the 50/30/20 budget offers a good framework to start thinking about your spending and how you can make changes to better meet your needs and goals. Below we’ll cover what the 50/30/20 budget entails, its advantages and disadvantages, and discuss whom it may work best for.
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What Is the 50/30/20 Rule?
The 50/30/20 budget is one of the most popular types of personal budgets because it’s easy to understand and gives you a solid structure to start growing your wealth. Essentially, this plan splits up your expenses into three categories: needs, wants, and savings. Each category is assigned a percentage of your total monthly spending.
Let’s break down the three categories:
- Needs (50%)
- Wants (30%)
- Savings (20%)
The 50/30/20 budget ensures all your needs are met, you have extra money allocated for non-essential spending, and you regularly save money for emergency savings, debt, and retirement.
🍎 Needs: 50%
Ideally, you should be devoting 50% of your take-home pay to your fixed expenses. These should only be the things that are absolutely necessary and that you need to live including:
- Rent or mortgage
- Groceries
- Insurance
- Health care
- Transportation
- Utilities
- Child care
- Minimums on your loan payments
📺 Wants: 30%
In the 50/30/20 system, your “wants” consist of anything that’s not strictly essential to living or to your work. For instance, you may have a car to commute to and from work and this would be a “need,” but splurging on a luxury car would then spill over into your “wants” category. Alternatively, you’ll have to purchase new clothing from time to time which could be included in your “needs” category, but buying the most expensive brands is not essential and would therefore be a “want.”
Other expenses in the “wants” category include:
- Dining out
- Travel
- Entertainment
- Monthly subscription services
- Gym memberships
- Hobbies
- Cable TV
- Electronics
- Beauty appointments
📈 Savings: 20%
The remaining 20% should go towards your savings and debt reduction, focusing first on your high-interest loans and consumer debt like credit cards.
Other expenses in this category can include things like:
- Retirement accounts like a 401K or IRA
- Emergency funds
- Savings to put toward a down payment for a house or property
- Debt payments that exceed the minimum amount due
50/30/20 Budget Example
Using a take-home, monthly income of $4,000 (after taxes and withholdings), a 50/30/20 budget would break down into the following percentages:
- Needs: $2,000
- Wants: $1,200
- Savings: $800
However, depending on where you live and the average rent in your city, your basic expenses may end up being more expensive than the $2,000 allocated for needs.
In this example, let’s say the basic needs of this individual are:
Needs:
- Rent: $1,200
- Groceries: $500
- Insurance: $130
- Transportation: $150
- Utilities: $180
The total “needs” costs here are $2,160 which comes out to 54% instead of 50%. For many people, the 50/30/20 plan will be something to work towards, and you will likely have to adjust your individual percentages as you progress through it.
In this example, you would now have to reduce the amount of money allocated to your other two categories:
Wants (now $1,040):
- Dining out: $300
- Entertainment: $260
- Monthly subscription services: $90
- Gym memberships: $100
- Clothing/personal care: $120
- Cable TV: $80
- Hobbies: $90
Since we’ve reduced the money in the “wants” category, this leaves the original amount in the “savings” category of $800 which could be apportioned like this:
Savings
- Credit card debt: $350
- Additional student loan payment: $200
- Emergency fund: $250
Who Is the 50/30/20 Budget Best For?
The 50/30/20 budget is best for those with an average to above average income, but this isn’t always true depending on what part of the country you live in and what the average living expenses are. When fully implemented, this plan works best for those who can stay consistent and disciplined within their spending categories – or who want to prioritize reducing debt.
Advantages of the 50/30/20 Budget
- Its simple structure makes it easy to start implementing and follow.
- It provides clear boundaries that can help you learn how to spend less money on non-essential items and think about what you really need.
- With a focus on debt reduction, it will help improve your credit score and free up money for long-term savings and goals.
- Helps to build long-term financial stability.
- It ensures your most basic needs are met first.
Disadvantages of the 50/30/20 Budget
- Many people find it hard to allocate 20% of their income toward savings.
- If you live in a large metropolitan area with a high cost of living, it may be difficult or impossible to include all your needs with only 50% of your income.
- Individuals or families with young children will often exceed the 50% threshold for “needs” due to the high cost of child care.
How Does the 50/30/20 Budget Compare?
| Type of Personal Budget | Description |
|---|---|
| Traditional Budget | Subtracts monthly expenses from income, ideal for beginners. |
| 50/30/20 Budget | Divides income into 50% for needs, 30% for wants, and 20% for savings/debt. |
| Zero-Based Budget | Allocates every dollar of income to specific categories until it equals zero. |
| Goal-Based Budget | Focuses on specific financial goals with some flexibility. |
| Spending Cap Budget | Sets a maximum cap on monthly spending to encourage savings. |
| Envelope System Budget | Uses physical cash in envelopes for different spending categories. |
| Pay Yourself First Budget | Prioritizes savings by setting aside money for savings first. |
| Sub-Savings Accounts Budget | Creates detailed savings goals within a primary savings account. |
| Anti-Budget Budget | A relaxed approach: save first, pay bills, and spend the rest freely. |
Does the 50/30/20 Budget Really Work?
The 50/30/20 plan is one of the most popular and commonly cited personal finance tools for several reasons. It’s easy to understand the basics and it provides a simple view of your finances and goals, so you can get out of debt and start saving for your future.
Although many people may find it hard to hit the exact percentages, as long as you’re working toward them, this budget can still be incredibly useful and effective and is worth trying if only to get a better idea of your spending habits.
What if my essential expenses exceed 50% of my income?
It’s okay to use the 50/30/20 framework as a guide and know that your exact totals may not fit exactly into it. For instance, if you live in a city with a high cost of living, your “needs” category may be closer to 55 or 60% and you’ll have to reduce the other two categories accordingly. To do this, you may choose to take your “wants” down to 25% and your “savings” down to 15%, or you can transfer all of your additional income into savings keeping it at 20% and further reducing your “wants” to 20%.
How do I get started with the 50/30/20 budget?
Before implementing any budget, you may want to spend a month or two tracking your spending and creating a data table so you have a clear picture upfront about what you’re working with. This will allow you to better understand what your true income is each month, and differentiate between which expenses are strictly necessary and which ones are discretionary.
How can I make using the 50/30/20 budget easier?
One simple way to put this budget into place is by automating your savings contributions. Set up a recurring, automatic transfer from your checking account into a savings or investment account each month. This will reduce the chances you’ll use that money on something else while also lowering your workload. Consider trying one of the best budgeting apps to help manage your spending.
