The 50/30/20 Rule for Budgeting

Virtually every successful financial plan rises from the same foundation: a workable, sustainable, well-balanced budget.

As with most schemes, however, the devil lurks in the details. To reap the benefits of budgeting, you need a plan that helps ensure each incoming dollar is properly assigned to the categories comprising your financial life.

One popular, straightforward and proven budgeting method is the 50/30/20 rule, which provides broad guidelines for the efficient allocation of your income.

“The 50/30/20 budgeting method can be a great first budget method to try,” says Kari Lorz, a Certified Financial Education Instructor and founder of Money for the Mamas. “[The plan] gives structure to your spending without being too constricting, and it still allows for spontaneity.”

What Is the 50/30/20 Rule?

Popularized by Sen. Elizabeth Warren (D-Mass.) and her daughter, Amelia Warren Tyagi, in their bestselling how-to book, “All Your Worth: The Ultimate Lifetime Money Plan” (2006, Free Press), the 50/30/20 plan simplifies household finances by dividing spendable dollars into three categories: needs (50%), wants (30%), and debt/savings (20%).

Following the 50/30/20 plan helps keep household finances in the trim by limiting elaborate, and possibly crushing obligations, such as a massive mortgage payment or car lease that crowds out savings or even stress-relieving “fun” splurges.

“It is important to have a budget and get your arms around how your money is being spent,” says financial adviser and Certified Divorce Financial Analyst Amy Colton.

“It amazes me how many people don’t have a budget and don’t know how much they need to live on each month. So, starting with a simple spreadsheet that tracks your monthly expenses is key to good planning.

“Once you understand where your money is going, you can start looking at what is essential and what is discretionary.”

Monthly Take-home Pay

Taking Colton’s advice, begin at the beginning.

The 50/30/20 plan operates on the budgeter’s post-deductions income, or “take-home pay.” For employees, it’s the bottom line on their paychecks, the amount that remains after taxes.

You may have other deductions, such as retirement plan contributions, health insurance payments, and miscellaneous obligations; make them part of your take-home pay. These are accounted for elsewhere in your 50/30/20 plan.

50%: Needs

Warren and Tyagi describe this category as “must-haves,” or necessities that cannot be put off even temporarily. The “Needs” category accounts for (mostly) monthly commitments that are essential to life. These include:

• Housing (mortgage payments or rent)
• Utilities (water, sewer, electricity, gas)
• Food (grocery essentials)
• Transportation
• Insurance (homeowners, renters, vehicle, health, life)
• Property taxes (if they’re not escrowed by your mortgage-holder)
• Minimum debt payments
• Child care, diapers, formula

30% Wants

With rare exception, all work and no play makes folks grumpy. And while we begrudgingly concur with the axiom about money buying true happiness, the 50/30/20 plan provides room for the successful budgeter to spend on recreation, which can relieve our stress and make us more interesting.

Those new to budgeting — and having trouble distinguishing between needs and wants — may find it difficult to construct silos strong enough to prevent the mingling of dollars. Here’s a broad outline of “wants,” or nonessential spending, to get you started:

• Entertainment (movies, theater, sporting events, concerts)
• Eating out (including coffee runs, ice cream shops)
• Vacations
• Monthly subscriptions (Pandora, Prime Video, Planet Fitness)
• Hobbies/interests
• Leisure goods, luxury household items, upscale apparel

20%: Debt Payments, Savings and Investments

This category of your 50/30/20 strategy is designed to develop and maintain a financial cushion. Although the smallest portion of the plan, when successfully implemented, it packs the potential to provide the greatest amount of serenity.

Stick with it, and the 20% solution will enable you to pay down and ultimately eliminate debt; build an emergency fund; and save for the future. Your checklist includes:

• Paying off debt (above and beyond minimum payments) by employing a proven strategy, such as debt stacking.
• Creating an emergency fund. The rule of thumb is to have 3-6 months’ worth of expenses stashed in an easily accessible savings account.
• Saving for retirement (including the 401[k] or similar plan already deducted from your paycheck).

Pros and Cons of the 50/30/20 Rule

Personal finance is exactly that: Personal. When it comes to implementing the 50/30/20 rule, current conditions suggest your mileage may vary. Stubborn inflation hit some harder than others. Ditto surging interest rates. And, generally, wages have not kept up.

Is 50/30/20 for you? Let’s sort it out and see.

Pros

• As mentioned above, the 50/30/20 rule is straightforward. It’s also simple, intuitive and effective. The 50/30/20 rule doesn’t require a degree in advanced accounting to understand or follow.
• By holding people accountable, the rule makes certain that household financiers live within their means. Following the rule means family finances remain in balance.
• There’s a built-in “treats” allocation that provides for guilt-free stress-relief spending.
• Diligently followed, the plan ensures that its practitioners will eliminate debt and build savings.

Cons

• The 50/30/20 rule may be difficult, if not downright unrealistic, for those with lower incomes.
• For those who live in higher cost-of-living regions where housing is especially expensive, even those with comparatively high incomes may be challenged to follow the rule.
• Personal circumstances — multiple children, elderly parents in need, significant healthcare expenses, or other unusual costs — may make it difficult to keep the “needs” portion under 50%.

How to Make the Most of the 50/30/20 Rule

Although the 50/30/20 budgeting rule is designed to be easy to follow, there still are ways to make the process more effective. Make the most of the 50/30/20 rule by adopting a few best practices. These efficiencies include:

• Automating savings. If your employer uses direct deposit, divert a portion of your take-home pay to a separate savings account. Lorz, for instance, is a big fan of automatic transfers to fund vacations.
• Maximizing your employer’s 401(k) match. If your company matches the first 5% of your contribution, budget for 5%; otherwise, you’re leaving free money on the table.
• Using the allocations to identify overspending, identify priorities, and spot cost-reduction opportunities.
• Paying off outstanding debt, then using the 20% category to build investments and develop a retirement plan.

“My #1 tip is to save your ‘savings’ amount right after payday,” Lorz says. “That way, the money is gone; it’s not sitting in your checking account, which might be tempting.

“For example, we set up our retirement and [automatic] fund contributions to be auto-transferred two days after payday. That way, we always move forward with our financial goals, and we never forget to move the money or be tempted to spend it. Out of sight, out of mind.”

How to Get Help with Budgeting

Resolving to create and follow a budget is the first step toward ensuring your financial future. A budget that works for your unique circumstances can help you develop healthy accounting habits while strengthening your understanding of and relationship with money.

“I know that budgeting can be intimidating initially,” Lorz says, “but it can do many positive things for life. The main reason people start a budget is that they find they’re spending too much and unable to pay off their credit cards every month.

“This financial stress stacks up and takes a toll on not only your mental health but physical health too. Following a budget can help eliminate that stressor and make room in your brain for more important and enjoyable things, as well as having a body free from knots and stress headaches.”

A variety of proven budgeting strategies exist, each with their own benefits and drawbacks. Investigate some of the others, which go by names such as “the zero-based budget,” “the envelope system,” and the “pay yourself first” scheme. Compare these to the 50/30/20 plan to see which strikes you as the most suitable for your situation.

“[The plan] is going to vary from individual to individual, depending on your life goals,” Colton says. “For example, if retiring at age 55 is one of your goals, you may need to put more than 20% of your net income in savings. If taking an expensive vacation every year is important, then you need to factor that into how much you put aside for entertainment and travel.

“You may want to consider working with a financial professional who takes into consideration your financial as well as life goals since these can vary from person to person.”

Colton is right: Setting yourself up for long-term financial success may not be a project you want to tackle alone. Fortunately, free services, provided without obligation or expectation, are available through nonprofit credit counseling agencies, such as the one offered by InCharge.

Expertly trained in the nuances of personal finances and debt management, credit counselors bring a vast array of tools to every discussion of household stewardship. Your future self will thank you for taking advantage of this resource.