A Beginner’s Guide to the 50/30/20 Budget Rule

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We all know someone who loves numbers.

They’ll spend hours poring over budgeting spreadsheets, examining the finer details of their investment accounts, and organizing the cash in their wallet by denomination.

For someone like that, offering basic budgeting advice is like preaching to the choir.

For the rest of us, there’s the 50/30/20 budgeting system.

Whether you’ve struggled to budget consistently in the past or you’re looking to find a less time-intensive method, the 50/30/20 might be the approach you need to finally make it all click.

What is the 50/30/20 Budget?

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The 50/30/20 system was designed to make budgeting more accessible to people who get overwhelmed by complicated spreadsheets and budgeting apps. It was popularized by Senator Elizabeth Warren in her book All Your Worth: The Ultimate Lifetime Money Plan.

The beauty of the 50/30/20 budget is in its simplicity. It’s designed for people who want to track their spending without dividing each expense into a dozen separate categories.

Users of the system divide their transactions into just three buckets: needs, wants, and debt payments/savings. Spending is broken up into 50% for needs, 30% for wants, and 20% for savings and debt. Groceries would be in the needs group, makeup would be a want, and student loan bills would be a debt payment.

Here’s an example of what kinds of transactions might fit into each category:

Needs – 50%

  • Mortgage/rent
  • Car payment
  • Car insurance, maintenance, and gas
  • Public transportation
  • Health, life, disability, and other insurance
  • Daycare, school tuition, etc.
  • Groceries
  • Utilities, phone, and internet
  • Medical bills and prescriptions

Wants – 30%

  • Eating out
  • Movies, sports, and concert tickets
  • Clothes, shoes, and accessories
  • Makeup and hair products
  • Cable TV
  • Netflix, Spotify, and other subscriptions
  • Home decor and furniture
  • Gifts
  • Charitable donations
  • Travel

Savings and Debt – 20%

  • Retirement contributions for your 401(k) or IRA
  • College savings
  • Short-term savings goals
  • Student loans
  • Personal loan payments
  • Credit card bills

Is the 50/30/20 Budget Right for You?

If you’ve tried to budget before and never quite got the hang of it, a 50/30/20 budget might be right up your alley. It’s like starting a fitness program. Jumping straight into a powerlifting routine might leave you sore and unmotivated, but starting with some light yoga will allow you to build a consistent exercise habit.

With the 50/30/20 system, you can start with the basics and get more complex as your financial literacy improves. It’s less of a specific system and more of an overarching philosophy.

It’s Vague but Flexible

The 50/30/20 budget has become popular with people who struggle to categorize their spending. If you have separate line items for household goods and groceries, for example, a simple trip to Costco for saran wrap and cooking oil forces you to separate individual items from your receipt. With the 50/30/20, that kind of fussing is unnecessary.

The upside to this broader approach is that you spend less time figuring out how to budget each shopping trip. The downside is that you don’t really see where your money is going. If you need to cut some expenses from your “wants” category, the 50/30/20 budget won’t show exactly where you’re overspending.

It Puts Savings and Debt on the Back Burner

One of the reasons the 50/30/20 budget is popular is because it allows for 30% of a consumer’s income to go toward discretionary spending. Unfortunately, that doesn’t leave as much room for savings and paying off debt.

If your student loan payments make up 20% of your budget and you aren’t saving anything for retirement, the 50/30/20 approach could give you a false sense of stability. In reality, you’ll just be forced to play catch-up in the future.

Anyone who uses the 50/30/20 budget while paying off a significant loan balance should still try to save between 10-15% of their salary for retirement, even if that means shifting the spending ratio to allow for more saving.

It May Not Be a Long-Term Solution

The 50/30/20 is often suggested for beginners because it’s easy to use and set up. It also leaves a lot of room for variation, as long as you’re staying within the correct spending ratio.

But as a long-term budgeting strategy, the 50/30/20 budget might not hold up as well as a traditional line-item budget. That’s because the 50/30/20 split makes less sense above a certain income bracket.

When you’re making an entry-level salary, the 50/30/20 ratio is perfect. It allows you to enjoy your life and live comfortably while still prioritizing debt repayment and saving for retirement. But as your career progresses and your income increases, spending 30% of your income on discretionary items can be frivolous, and it can hold you back from reaching significant financial milestones.

Under the 50/30/20, someone making $80,000 a year after tax would have $2,000 a month for discretionary spending. That may be reasonable for someone with a robust social life and multiple hobbies, but many people would have to go out of their way to spend that much. As you approach upper-middle class, it makes more sense to follow a personalized budgeting system and devote more of your income to building a nest egg.

How to Use the 50/30/20 Budget

There are three simple steps to creating and implementing a 50/30/20 budget spreadsheet.

Step 1: Figure Out Your Take-Home Pay

The first step in creating a 50/30/20 budget is to figure out your net income since that’s the figure you’ll be dividing from. Your net income is how much you take home after payroll taxes are deducted.

Look at your most recent pay stub to see what your take-home pay is. Even though your health insurance and retirement contributions may be deducted from your paycheck, you want to count these expenses as part of your budget.

If you’re self-employed, you’ll want to figure out your take-home pay after federal and state self-employment taxes. These will vary depending on your income and business expenses, so just use your best estimate.

People with irregular salaries, like salesmen working on commission or those with seasonal income, should use a realistically low figure when calculating take-home pay.

Step 2: Calculate Your Percentages

First, make a list of all your transactions from the past month:

CategoryAmount
Rent$775
Electric bill$50
Water/gas bill$60
401(k) Contributions$100
Car payment$250
Car insurance$65
Restaurants$150
Groceries$350
Health insurance$95
Gas$115
Cell phone$45
Internet$55
Lyft/Uber$50
Student loan payments$250
Netflix/Hulu$30
Clothes, shoes, and accessories$100
Makeup/haircare$35
Pets$40
Total:$2,615

Then divide them into needs, wants and savings/debt categories. Divide each of the three categories by your take-home pay to calculate your percentage, then compare those percentages to the ideal amounts. For this example, let’s assume a take-home amount of $2,700 per month.

Needs50%Wants30%Debt/Savings20%
Rent$775Restaurants$150401(k) Contributions$100
Electric bill$50Netflix/Hulu$30Student loan payments$250
Water/gas bill$60Clothes, shoes, and accessories$100Car payment$250
Car insurance$65Makeup/haircare$35
Groceries$350Pets$40
Health insurance$95Lyft/Uber$50
Gas$115
Cell phone$45
Internet$55
  
Total:$1,610$405$600
% of Income:60%15%22%

Step 3: Adjust Your Spending and Saving

Like most people who create a 50/30/20 budget, you’ll probably discover that your percentages are out of alignment like the example above. Maybe you’re spending too much on your needs and not enough on your savings, or your wants category might be out of control. Don’t beat yourself up – it’s normal to find out your spending is a little off.

Examine where you need to make a change and explore options for how to save money in those categories. In this example, you can clearly see that the needs category greatly exceeds the 50% goal. To cut back, this person could reexamine their utility usage, negotiate with their cell and internet providers, or find a less expensive apartment.

You can also see in this example that student loan and car payments are mostly responsible for exceeding the 20% debt payment/savings category. In that case, it could be wise to make a faster debt payoff a goal or try to pick up a side hustle.

Related: Personal Capital vs. Mint: A Side-by-Side Comparison

The 50/30/20 Budget Simplifies Managing Your Money

Overall, consumers who like and stick with the 50/30/20 budget do so because of how simple it is. There’s little doubt on how to categorize expenses, and evaluating your spending can take just a few minutes each week.

The 50/30/20 budget has stuck around because it helps people who want to be responsible with their money but don’t like the restrictive nature of most budgeting systems.

Author
Zina Kumok

Hi, I'm Zina! I'm a personal finance expert with a passion for helping millennials figure out their most pressing financial issues. My interest is personal -- I paid off my student loans in three years and have been helping others take control of their finances ever since.My work has been featured in the Washington Post, Fox Business, Time, Quicken Loans, LendingTree, Forbes, Money.com, Mint, and many more. I currently live in Indianapolis, IN with my husband and two dogs.

1 comment
Caitlin
Caitlin

I use the 50/30/20 budget and have read a lot of other finance and budgeting blogs about it – one observation is that minimum payments on debts should all go under the necessities category. You mentioned that people with high student loan payments or other debt wouldn’t have enough for saving – this is solved by including minimum required payments in the necessities category and keeping the savings category for only investing (retirement, real estate, stocks, etc), saving for emergencies and large goals such as buying a home, and making *extra* principle only payments on your debt which is included in the savings category because it saves you interest over time. Child support payments are also a necessity.

This is what most blogs on the topic say to do since making minimum payments on debts and financial obligations like child support really is a necessity, since you’d face fines, wage garnishments, ruined credit, suspended licenses, and passports, in some cases, etc. if you don’t pay your debts. A certain amount of clothing and personal care is also in necessities (job interview clothes + basic clothing) – extra just for fun clothing and fancy personal care items like bath bombs, expensive skincare, etc. go in discretionary spending. Basically necessities is how you’d spend your money if you were unemployed and had to only purchase the bare minimum to get by. Incidentally, your monthly necessities total is what you should base your emergency fund off of (emergency savings = 3-6 times your necessities budget or up to 1 year if you are self-employed or a single earner in a precarious job).

If you don’t make enough money to include your minimum debt payments, and affordable basic capsule collection of clothes and basic personal care items (toothpaste, deoderant, affordable shampoo, conditioner, body wash, lotion, and a basic skincare routine) in necessities, then lower your discretionary spending amount – for example 60% necessities, 20% spending, 20% saving/investing/extra debt payments. You might also lower spending for a time in order to save for a house or other large financial goals, up to 30% or more towards saving/investing.

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