The 50/30/20 rule is a simple principle that divides your monthly after-tax income into three spending categories: needs, wants, and savings. It gives families a loose guide to take inventory of spending habits and reassess their financial goals. The 50/30/20 rule suggests that the key to financial health is to allot 50% of your after-tax income for needs, 30% for wants, and 20% toward savings. With only three major categories to track, you can save yourself the time and stress of getting lost in the details every time you spend. 

Where does the 50/30/20 Rule come from?

Senator Elizabeth Warren created the 50/30/20 Plan to help the average American family better manage their money. Elizabeth Warren recognized that Americans struggle to save money and achieve financial stability due to the rising cost of living and stagnant wages. The 50/30/20 plan was inspired by Senator Warren’s book, “All Your Worth, The Ultimate Lifetime Money Plan.” After her book was released, the 50/30/20 plan became a commonly discussed method of budgeting and saving for the American family.

How to apply the 50/30/20 Rule: a step-by-step guide

When getting ready to implement the 50/30/20 rule to your budget, remember that it is a guide and can be adjusted based on your personal goals and spending habits. First, you’ll want to add up all the monthly income from you and others in your household and list your expenses. Don’t forget costs that might be easy to overlook, like your cable bill, streaming service, and cellphone bill. Now we will separate them into buckets. 

50% Towards Needs

The need bucket will be something you cannot live without, such as electricity, water, and housing costs. You may want to add clothing to this section, but you have clothes to wear, so this is not an urgent need to be met this month. Here is a list of items that would be added to the needs bucket;

• Housing expenses
• Utilities, including internet and cellphone
• Transportation, including car payment, gas, parking, and insurance 
• Childcare
• Insurance
• Internet (if you work or go to school from home)

Once you have finished the list and started to add up the total monthly cost of the items under needs, you may see that it is over the suggested 50%. This will mean that you may have to scale back in other areas like trading in a car that has higher insurance or payments, limiting take-out food and packing lunches for work, and carpooling with co-workers and friends is an option. 

30% Towards Wants

This is the part of the budget that you get to assign to bills and items you want. If you have a family, sit down and discuss what each person can spend on each month’s wants. Things that may be included in this bucket;

• Streaming services, cable
• Entertainment, dining out, movies, golfing
• Internet (if you don’t work from home, it is a want)
• Hobbies and recreational activities such as skiing, golfing, and gym memberships
• Vacations
• Gourmet or brand name food items
• Clothing
• Hobbies

This section should be carefully reviewed. If there are items that you cannot afford but want, then see how you can save money with items on the list. For example, if you have a gym membership on the list but cannot find the money to have the money to keep your favorite streaming service, then consider working out at home or walking near your home. You will still get your exercise but save the gym membership cost.  

20% Towards Savings

The savings bucket is what is left after needs, and wants are taken care of. There should be roughly 20% left to invest in whatever way you decide to save you money. Ways you can save;

• Retirement
• 401(K), Roth IRA
• Emergency savings account
• Debt repayments, such as credit card debt or any high-interest debt
• Short-term savings, such as a down payment for a house or upcoming vacation
• Education savings, such as a 529 plan

An emergency fund should be an initial priority because you never know when an appliance may break or your car needs repaired. Having money saved keeps you from using high-interest credit cards to pay any emergency expenses. 

Example of the 50/30/20 Rule

Using the steps above, we will give you an example of using the 50/30/20 plan. We will use Jessica and Sam’s income for our model of the rule to budget money. 

1. Calculate your income after taxes. After taxes, Sam and Jessicas combined monthly payment is $6800.
2. Categorize Your Spending. Here is how Sam and Jessica can figure out how much they can spend on various categories.

Net Monthly Income $6800

•  Needs $6800 X 50% = $3400  
•  Wants $6800 X 30% = $2040
•  Goals $6800 X 20% = $1360

      3. Take Inventory Of Your Current Spending

Jessica and Sam have now figured out how much money they have to spend in each category. This is where they need to sit down, and they should look at the past few months of spending to see what bills and items are reoccurring regularly. For example, a trip or bill that only occurred once would not be figured into your budget unless one of them is listed under the needs category. These would not be listed under needs you pay for regularly. 

This part of the process allows you to see where you may be able to cut back spending or save money by downsizing. If you have a cell phone plan that is too much for what you need, you can consider downsizing to save money. Your cable bill may include every movie channel, but if you also have a streaming service, you could compare prices and see which one suits your needs, so you cancel one of the services to free up additional money.

Other budgeting methods 

There are many ways to budget your money, and it is important to see which works best for your family. If you do not have the patience to write down every month, then a plan like the 50/30/20 works well since you only track the three major categories and not each purchase.  

• 80-20 Rule. The 80/20 rule of thumb is a simple approach to budgeting. It looks at your take-home income after taxes and any other expenses taken out of your paycheck. You put 20% of your take-home pay into savings. The remaining 80% goes toward your costs. This is a simple plan, but you need to be diligent in making sure all bills are paid and not overspending on extra items each month. 
• 70/20/10 Rule. The 70/20/10 rule is the same basic principle as the 50/30/20 rule. You will take your total income after taxes, and 70% of it will go towards your expenses, including housing, utilities, and entertainment. Next, you set 20% aside for savings and investments such as your retirement or an emergency fund. The remaining 10% will be used to pay off credit card debt or student loans. 

Is the 50/30/20 rule budget good for you?

Finances can be confusing, and many people do not know how to budget or don’t want to take the time. The 50/30/20 plan is relatively simple once you have figured out your total income and expenses. Then it is as simple as deciding what a necessity in your life is, what is something you want and what things you can do without. After your savings grow and you have an emergency fund that will last a few months in case of a job layoff, you will feel the relief of financial security and preparedness.

Final Thoughts 

Budgeting can seem like a daunting task, but methods such as the 50/30/20 plan that we discussed above are relatively simple and take very little time to get started. By dividing your paycheck into three categories, your money is allotted for needs, wants, and savings each month. The only thing required is to make sure you stay within your limits. If you are overspending on wants but do not want to give anything up from that category, then reassess how you can save more money in the needs category. In the end, you need to customize and make the budget work for you and your family.