What Is The 50/30/20 Rule?

Start your calculation with your post-tax income. Then devote 50% of your income to needs, 30% to wants and 20% to savings and debt reduction.

50/30/20 Budget Calculator

Using a 50-30-20 budget can help you cover your necessary expenses, plan for your future and enjoy some luxury in your everyday life. Allocating your net pay to larger buckets can help you understand where to place your funds and how to budget effectively. That way, you ensure you cover your needs, save money, and allow yourself a little extra toward things you want. Use the calculator to easily view how your net pay breaks down into these categories.

What Is the 50/30/20 Budget Rule?

The 50 30 20 rule is a popular budgeting method that helps allocate your after-tax income into three main categories. After-tax income is left in your paycheck after your employer deducts income taxes. 

However, you will likely also have payroll deductions for other essential items come out of your pay before your employer cuts the check. These additional items include parking, health insurance, 401(k) contributions or other forms of insurance that you elect. For the 50/30/20 rule, you won’t subtract these expenses from your gross income when building your calculations toward the various buckets of needs, wants and savings. 

In summary, when preparing to enact this budgeting method, start with all your income, less your taxes. Then, you’ll be ready to build your budget using these calculations.

50% — Needs

Your needs are the items that you can’t live without. You’ll include these expenses in this category.

• Mortgage/rent
• Utilities
• Essential food
• Insurance (including those premiums your employer takes directly from your paycheck)
• Child care
• Minimum loan payments
• Clothes required for work or your child’s school

30% — Wants

Now, outline your wants and see if you can get them to a comfortable budget within 30% of your after-tax income. Be careful when designating expenses in the wants versus needs category. Some people will put wants in the needs category by mistake, such as including eating out in the needs when cooking at home is less expensive, making takeout and restaurants want in most cases, except perhaps when on required work travel. Here’s what might go in your ‘wants’ category.

• Gym membership
• Streaming services
• Travel
• Entertainment
• Tickets to shows, concerts, festivals, etc.
• Restaurants, cafes, ice cream shops and other forms of eating out or taking in food that is not from a grocery store
• Shopping for nonessential apparel
• Housewares

20% — Savings and Debt Repayments

Although savings and debt repayments are the smallest category, they’re just as important. They help you prepare for your future and ensure you’re ready should surprise expenses hit. Building a financial cushion into your budget means you won’t live paycheck to paycheck and deal with the stress that can be associated with managing your finances in that way.

Some places where you should allocate your savings and debt repayments include the following:

• Build or grow your emergency fund
• Place money in retirement savings, such as a 401(k) or IRA
• Paying down debt, starting with the highest-interest debt, such as credit cards
• Building an investment account to start earning passive income

Benefits of the 50/30/20 Budget Rule

Many people find the 50/30/20 budget rule helpful in managing their finances and building an enjoyable lifestyle with minimal stress about money. Here are some benefits you might experience once you start disciplining your budget using this method.

• Simplicity: This budgeting method is so popular because it is simple and easy to follow. Once you know where to allocate your funds, you can quickly start living by this budget and distributing your funds accordingly.
• Clear money management: Before following a specific budgeting method, you might wonder where your money is going. It’s hard to understand the nuances of your funds and rein in spending if you aren’t sure of practical places you can do so. And it might feel like your savings aren’t growing because you don’t have a set plan. But with this method, you’ll have complete clarity about where your funds are going and why.
• Expense prioritization: Ensure you have the funds to cover essential needs. When you start with your needs and allocate funds to your wants, you’ll guarantee you have the funds you need to live. This also helps prevent debt accumulation to cover items like groceries or utility bills.
• Disciplined savings: When you commit to putting 20% of your after-tax income toward savings each month, you’ll ensure your emergency fund is growing, you’re preparing for retirement, and you're making progress toward paying off debt. Consistent savings help you prepare for the unexpected so that one surprise expense doesn’t completely derail your finances and lead to new debt that you have to work to pay off.
• Greater financial security: Most people don’t mean to put themselves in a situation where they must take on debt to cover everyday expenses. They just aren’t sure where their money is going or feel like they have to put funds toward certain costs that aren’t truly necessary. But with a set budget, you’ll know you have a financial plan and road map that will help you get from where you are now to where you hope to be.

How to Apply the 50/30/20 Budget Rule

Once you’re ready to start budgeting, follow these steps to managing your finances using the 50/30/20 rule.

1. Review Your Income

Spend some time getting to know your paycheck in a deeper way. You likely know your gross salary, but you might need help understanding where various parts of your paycheck are going.

Look at your post-tax income. Then, review other expenses coming out of your paycheck. Ensure you’re getting the full benefit from these other expenses. For example, if you’re paying more for vision or dental insurance than you see the benefit of, you might consider no longer electing for these coverages. Or if you opted for pet insurance but aren’t seeing savings from the insurance or no longer have a pet, be sure to eliminate that coverage.

Now, break your after-tax income into the three categories necessary for budgeting using the 50/30/20 rule to prepare for further budget building.

2. Identify Necessary Expenses

There’s a reason why needs come first in the budgeting method. You need to look at your necessary expenses to see if you have enough income for half of your post-tax income to cover these expenses. If not, you might need to look for ways to reduce your necessary expenses, such as downgrading your apartment size, refinancing your mortgage or going on a budget plan with your utility companies. Reducing the needs category can be challenging, but there are strategies for finding cost savings in these areas. For example, you could buy more groceries in bulk at wholesale clubs or enjoy less expensive proteins, such as going from pork to chicken.

3. Track Expenses

You won’t know how you’re tracking each month toward your goals unless you keep track of your expenses. A budgeting app is a great way to see where your money is going and stay within your monthly parameters. Review your budget at the start of each week so you know how much you have left in the wants category to decide whether you can eat out or enjoy other entertainment. 

4. Automatically Move Funds to Savings

Setting aside savings is challenging. But if you automate it, you won’t be tempted to spend it elsewhere. Automating also guarantees your savings. Your retirement savings might already be automated if it comes directly out of your paycheck. Set up recurring transfers from your checking to your savings or investment account to automate your emergency fund and investment savings. Set up recurring payments to your debts so you don’t have a choice but to make these payments toward your future.

5. Be Consistent

Do your best to stay committed to your goals every month. While you might have some months where you deviate from your goals a little due to surprise expenses, such as needing a new refrigerator or washing machine, you want to stay as consistent as possible to ensure financial prosperity.

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

Finding the right budgeting method will look different for everyone. While the 50/30/20 rule works well for most, some people find that it doesn’t fit their expenses. For example, individuals who live in high-cost areas might find that their housing expenses and essentials exceed 50% of their income and there is no way to change that. If that’s the case, you might need to adjust the percentages and spend less on wants.

You might need more than three categories for budgeting. Instead, some people need to itemize more and view expenses more broadly to ensure they stay on track. For example, you should set a specific dollar amount restriction on eating out to stay disciplined and manage that expense throughout the month.

Hitting the percentages exactly might cause you too much stress. Remember to be kind to yourself and patient if that's the case. Starting a new habit is challenging. It might take several months to a year to align your spending with your budget while increasing your income to the point where the budgeting method is comfortable.

Find Financial Prosperity Based on Your Income

You don't necessarily need to make hundreds of thousands of dollars annually to feel comfortable financially. Instead, find financial freedom based on your existing income by building a realistic budget for your needs.