What Is the 50/30/20 Budget Rule?

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When it comes to budgeting, there’s no one size fits all solution. We all have different incomes, desires, attitudes, and approaches to how we handle our finances.

If you’re the kind of person who prefers a relaxed, somewhat hands-off approach to budgeting, the 50/30/20 budget rule may be a good fit for you.

Where Did the 50/30/20 Budget Method Come From?

The 50/30/20 budget plan stems from the book, All Your Worth, written by Elizabeth Warren and Amelia Warren Tyagi. In it, they propose a means of dividing up your money in a way that brings balance to your finances.

They advocated splitting your after-tax income into three categories: Must-Haves, Wants, and Savings.

How Does the 50/30/20 Budget Rule Work?

The 50/30/20 budget aims to simplify budgeting by breaking it down into simple categories.

Here’s the breakdown:

  • Spend 50% of your money on Must-Haves
  • Use 30% of your money toward Wants
  • Put 20% of your money toward Savings

Step 1 – Define Your Must-Have Expenses

The basic rule of thumb is any expense that has a massive impact on your quality of life is a need or Must-Have.

Must-haves are things you consider non-negotiable for your standard of living, like housing, utilities, and groceries. They also include any minimum payment requirements you have on outstanding debt obligations.

According to the 50/30/20 method you want your Must-Haves to take up no more than 50% of your after-tax income.

If you’re spending more than 50% on your necessities consider downsizing to bring that number back inbounds. Bigger is seldom better when it comes to your expenses.

Step 2 – Clarify What You Want

While the 50/30/20 budget rule allows you more flexibility with your Wants spending (as long as it falls into the guidelines), it’s still important to determine your priorities to make sure you don’t overspend.

Because you won’t necessarily have a pre-defined purpose for all of the dollars in your Wants category, it’s important to make sure you’re spending falls in line with your goals.

Just because you can spend 30 percent of your money on eating out, doesn’t mean you should. You’ll have a better chance at success if you add a little balance into this segment of your budget.

Also, before you go crazy planning to buy all the things, remember how strict the Must-Haves segment of your budget is. Things like entertainment, unlimited cell phone data, and the bulk of your clothing fall into the Wants category, not under your Needs.

Step 3 – Save for the Future

The final 20% of your money should go toward your Savings goals.

This includes your emergency fund, investments, and any extra debt payments beyond the minimum due.

It also includes any post-tax retirement contributions you may make, like Roth IRAs.

If you have debt, I’d suggest building up your emergency fund first.

Save an amount large enough to cover unexpected expenses that might cause you to pull out your credit card ($1000 seems to be standard, but everyone has a different threshold).

Once you’ve got your emergency fund filled, throw everything else at your debt.

Remember, your percentage allocations come off of your take-home pay.

So while you should be funneling everything you can from this 20% savings toward your emergency fund and debt, you should also be contributing to your retirement from your pre-tax dollars (that’s your 401k or equivalent).

Talk to your employer to see if they offer a contribution match. If they do, make sure you’re saving at least that much.

The 50/30/20 Budget Plan in Action

Let’s see what the 50/30/20 budget method looks like in action using a take-home pay of $3,000 as an example.

Under the 50/30/20 budget rule, you’ll have $1,500 per month available for your necessities (Must-Haves). Your largest expense is likely to be your housing, but keep in mind it isn’t your only necessary expense.

If you have a mortgage of $1000, that leaves you with $500 for groceries, a car payment, insurance, utilities, and any minimums on your credit cards and loans.

It’s entirely possible your housing alone is more than 50% of your take-home pay. If that’s the case, you’ll need to make some tough decisions on how to bring your costs down.

The fastest way to reduce your housing expenses is to relocate somewhere cheaper, but that’s not always possible. So here are some other things you can do to reduce your Must-Have expenses:

  • Try meal planning to reduce your grocery costs
  • Comparison shop insurance companies
  • See if your utility providers offer budget billing
  • Consolidate your debt onto a low-interest credit card with a lower monthly minimum payment

Let’s assume for our example, we’ve got our needs covered with 50% of our income. Now we’re left with $900 for Wants.

Remember, this category includes things like entertainment, your cell phone, clothing, makeup and haircare, gym memberships, etc.

The best way to prevent overspending and stay under the 30% threshold is to get rid of credit and only spend the cash you have available.

Also, if you have non-negotiable expenses in this category, make sure you’re paying them first or setting money aside for those bills. It may help yo use my At-A-Glance Bills calendar to make sure you don’t spend all your Wants money before you cover your bills.

Finally, use the remaining $600 to Save for an emergency, pay down your debt, and plan for the future.

Problems With the 50/30/20 Budget Rule

The main problem with this budgeting method is that, by itself, it doesn’t lend itself to planning or being intentional with your money.

Unless you break down the percentage categories into a more traditional budget structure and add some sinking funds, you’ll likely end up raiding your emergency fund or pulling out the credit card for infrequent expenses like Christmas and insurance premiums.

Most people attracted to this plan are probably looking for a budget that doesn’t make them feel restricted. And by following the general outline, that’s exactly what they’ll get.

But without breaking down your spending goals further, this budget method isn’t really conducive to planning for the future.

Also, actually determining what constitutes a Need, Want, and even Savings can get a bit sticky. It’s all too easy to justify something like your cell phone as a necessity without really examining or reducing the expense.

For those that have struggled with their finances, taking control of your money requires a shift in mindset. This budget won’t provide that.

Who Should Use the 50/30/20 Budget Rule

Do you actively avoid budgeting because it feels too restrictive?

Are you clear on your priorities and rarely feel the urge to spend money on things that aren’t part of a greater plan?

Can you stop using credit cards?

If so, then this method may work well for you.

This budgeting method doesn’t require intense monitoring or tracking of your spending.

Plus, it offers the flexibility and freedom some people may crave in their budgeting.

Who Should Not Use The 50/30/20 Budget Plan

In a perfect world, this relatively simple approach to budgeting would work for anyone and everyone.

But if you like to know exactly where you’re spending your money, this method may be a little too hands-off for you.

The 50/30/20 budget plan is also heavily weighted toward spending.

For those that want to save at a more intense rate, this plan won’t get you there.

My Take on the 50/30/20 Budget Rule

For most people, especially those averse to budgeting, I think this method may be a great starting point.

It’s relatively easy to figure out your numbers and divide your income between Must-Haves, Wants, and Savings.

And if you can actually stick to those percentage buckets, you should do ok.

For those struggling to keep your spending under control though, this may not be the plan for you. The 50/30/20 budget method lacks the awareness and intentionality that you need to really take control of your finances.

Check out The Complete Budget Guide for other options that may suit you better.

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