What is the 50-30-20 rule?
Key Points About: The 50-30-20 Rule
The 50-30-20 budgeting method provides a framework for financial stability by divvying up your monthly income into three categories: necessities, savings, and personal spending.
50% of your budget should go to rent, groceries, and everyday priorities, whereas 20% goes to savings or paying down debts.
The other 30% is money that you can spend however you like.
If you’re like most people, the idea of making a budget stirs feelings of dread. Maybe even nausea.
Feelings of budget reluctance are pretty normal. After all, creating a budget can feel like a chore. Even learning about how to make a budget can feel like yet another “to-do” taunting you from a never-ending task list.
But budgeting doesn’t have to be stressful, stifling, or suck the fun out of your lifestyle. In fact, learning how to make a budget with the 50-30-20 rule could be your ticket to getting a handle on your financial situation while still doing the things you enjoy. The best part? Using the 50-30-20 rule to make a budget is straightforward and you only need to do it once.
Budgeting with the 50-30-20 rule
All you need to do to make a monthly budget with the 50-30-20 rule is split your take-home pay (that is, after taxes and deductions) into three categories:
- 50% goes towards necessary expenses
- 30% goes towards things you want
- 20% goes towards savings or paying off debt
That’s it. Simple, right?
50% of your budget for necessities
Like zero-based budgeting, the 50-30-20 budget rule assigns each dollar a specific purpose. According to the 50-30-20 rule, half of your take-home pay should go towards paying for “must-haves” (sorry, daily coffees and streaming services don’t count). For instance, if your monthly take-home pay is $2,000, according to the 50-30-20 rule, you should allocate $1,000 to pay for the monthly expenses that you need. This category includes any living expense that you must pay and that is necessary for your survival, such as your rent or mortgage, groceries, car payment or other transportation, and utility bills.
30% of your budget for wants
After necessities, it’s time to focus on discretionary spending. According to the 50-30-20 rule, you can allot 30% of your take-home pay to things you want. These are the “fun” expenses or items that make life enjoyable—vacations, shopping, restaurants, takeout, and monthly subscriptions.
Now, 30% may not sound like much, but again, if your monthly take-home income is $2,000, then based on the 50-30-20 rule, $600 could go towards expenses that bring you joy.
20% of your budget for savings
The final 50-30-20 budget rule category is savings or debt repayment, and 20% of your take-home pay belongs here. The idea is that you’ll use this 20% to increase your financial net worth—either by lowering debt or increasing savings. This category might include pre-or post-tax retirement savings, student loan or credit card debt payments, investments, or contributions to an emergency fund.
Did you know?
A quick word about high-interest loans: If you have a credit card with a high interest rate, making a balance transfer to a credit card with a low introductory APR may help you keep your payments manageable and potentially reduce your debt faster. Consolidating your debt with a low introductory interest (also called APR, or annual percentage rate) credit card might give you a golden opportunity to simplify your payments, increase your credit score and get laser-focused on paying off your debts as soon as possible.
The bottom line
Creating a budget is deeply personal. Depending on your specific financial situation and savings goals, the 50-30-20 rule may or may not work for you. But whether you adopt the 50-30-20 budget rule or not, it may provide a useful framework for saving for your financial goals while planning for the future and still enjoying the present.
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