How the 50/30/20 Rule of Thumb Works for Budgeting


Wouldn’t it be nice if you could budget without a fuss? The rule of thumb 50/30/20 can help you with this.

The rule can help you quickly see where you are and where you might need to make adjustments. It’s an easy way to get an overview.

What is the rule of thumb 50/30/20?

The 50/30/20 rule is a simple way of budgeting. To take advantage of it, you put 50% of your after-tax income on needs (aka must-haves), 30% on needs, and 20% on savings (and debt). Like all rules of thumb, it serves as a comprehensive guideline that works for many people.

It was created / popularized by Elizabeth Warren (yes, this Elizabeth Warren) and Amelia Warren Tyagi. They call it the Balanced Money Formula in their book All Your Worth.

Warren & Tyagi point out that comparing your spending to the rule “will help you see when something is wrong and show you where to look at your money decisions”.

How does the 50/30/20 rule for budgeting work?

The idea is simple. You split your budget into three parts and stick with those three parts to keep your money life in balance.

So with the 50/30/20 rule, your budget looks like this:

Pie chart example of a 50/30/20 rule budget with 50% demand, 30% demand and 20% savings

Keep a tight lid on the wishes. Don’t let your spend on wishes rise above 30%. And if it’s already over 30%, cut out some items from that category. (But don’t cut it all out – you need to have some fun money!)

Don’t skimp on the 20% savings either. If you are in debt, this method results in the 20% repayment. (With the idea that you are cashing it out, not adding more.)

Needs make up the rest. If you have too many needs right now, make changes over time. Do this until your expenses are balanced and the need is no more than 50%.

How to start the 50/30/20 rule

To use it, you need to know what your takeaway pay is. Once you find this, you can enter your take-away payment into the 50/30/20 calculator below to find your destination numbers:

(You can also multiply your take home salary by 0.5 to get your 50%, 0.3 to get the 30%, and 0.2 to get 20%.)

Here is a quick 50/30/20 plan example. If you bring home $ 2,126 after-tax monthly, your budget for 5/30/20 is as follows:

  • 50% requirement is $ 1,063
  • 30% wants is $ 637.80
  • 20% savings are $ 425.20

Find out and write down your monthly after-tax dollar amounts. Then look at your current expenses and break them down into three parts.

Start by identifying your needs

Sum up how much you are spending on everything that is needed. Needs are defined as bills that you have to pay for no matter what. In other words: must-haves. So these are things like groceries, housing, supplies, transportation, etc. They are the things you need to run your daily life.

Why 50% on needs? Only half of your income goes to must-haves. It enables you to stretch your money longer when life goes wrong. (Or maybe I should say when things go wrong in life because everyone experiences emergencies.) It reduces stress and makes life easier in general. You can be flexible.

So add up everything you spend in this area and write it down.

Then identify your desires

Next, it’s time to see how much you are spending on needs. Wishes are almost everything else, and you can do anything with the money in your desired category.

You can travel, buy new clothes, or go out to eat. You can donate to your favorite animal shelter, furnish your garden or sign up for all of the streaming channels. It’s up to you as long as your desired category stays at 30% or less.

Add again what you are spending on wishes and make a note of it.

(If you want to make sure you don’t overlook general needs or wants, check out this list of budget categories for ideas.)

Manage the savings

Savings are the third part (20%) of the 50/30/20 rule. The goal is to save and invest 20% of what you earn, but it also involves some debt in the beginning.

What debts go into this part of the budget? Usually debts that are not your home or car. For example, if you have payday loans, credit card debt, or old medical debts, pay them off from this part.

Remember, cashing out is key. They shouldn’t be an ongoing part of the savings package because you really need to save and invest. So ultimately your 20% will be.

Check your numbers and compare

Finally, review your overall spending for needs and desires. Then compare them to your target totals. Are your needs 50% or less of your takeaway pay? Are your wishes 30% or less?

If so, you are in good shape. You can keep doing what you do and check in regularly to make sure you stay on track. To make things simpler, automate your savings and needs as much as possible.

If not, look where you are up or down. Are you spending too much on needs or wants? You have to adjust.

How to adjust if your budget gets out of hand by 5/30/2020

If you’re spending too much on needs, the first thing to do is check to make sure you’re adding things that aren’t really needed. (Even if you like to have them in your life.)

For example, your kids don’t have to exercise after school or drive a brand new luxury car. Instead, these are needs. Postpone any expenses that are not strictly needed.

If all of the things on your needs list are really real needs but are more than 50%, you may need to get creative. Find out if you can find ways to make more money and pay less for those needs. This may not be fun, but it will help in the long run.

For example, if accommodation alone is 50% of your take-away salary, this is difficult for you. But you could try:

  • Moving to an area with a lower cost of living
  • Moving to cheaper apartments where you already are
  • Get roommates (or more roommates)
  • Rent a room by night on AirBnB to increase your income
  • doing a sideline
  • Let family move in with you
  • move in with the family
  • See if you qualify for housing assistance
  • etc

If nothing is too high, pick several to get creative. But change something even if you don’t want to.

When you’re spending too much on needs and not sending enough on savings, it’s easier. Reduce needs so you can balance things out by sending more in savings (and debt, if you have any).

If you are saving too much, make sure you are still having fun. Or if the savings are too high because they really are debt, work on using the debt snowball to clear those debts one by one.

Who is the 50/30/20 rule / balanced money formula good for?

If you use it to check that your money is not too high for the needs, it is good for everyone. Using it as a check-in every now and then helps keep things in check.

Using the 50/30/20 rule of budgeting is best for people who have not budgeted or not yet budgeted. People who want something that they can easily stick with without feeling disadvantaged.

But you still need to be ready to review and adjust your spending if it gets out of whack. Here’s an easy way to keep track of your expenses. Besides, it will really help – not just give information.

Who should use a different budgeting method?

If you prefer to keep a close eye on your money, you are probably better off with a zero-based budget. (Or another method plus this one.)

Why? Because the 50/30/20 rule is more about limiting your spending in wide areas. It’s not about paying close attention to what you are spending on.

The biggest mistake with the 50/30/20 rule is that it is a rule of thumb. It can work in many cases, but not all.

The bottom line

In conclusion, the 50/30/20 rule can help you plan your budget without a fuss. Wagering 50% on needs, 30% on needs, and 20% on savings and debt is an easy way to manage your money.

This balanced money formula will help you keep spending unbalanced, keep debt under control, and build a safety net. And these are all great things.