Should You Follow the 50/30/20 Rule?

Budgeting isn't just about crunching numbers — it's about being more mindful of your financial choices and their role in achieving financial success. There’s no one perfect way to budget, and there are dozens of ways to manage your money!

One of the more popular methods is the 50/30/20 rule, and it's best for people who generally don't like planning and tracking their expenses.

What Is the 50/30/20 Rule?

The 50/30/20 rule is a budgeting method where you divide your take-home pay (your monthly income after taxes) into three categories of spending: needs, wants, and savings.

You spend up to 50% on your needs, 30% for your wants, and 20% for your savings and/or debt repayment. 

Needs: 50% 

“Needs” are expenses that cannot be cut from your budget. Generally speaking, this covers housing, food, and utilities. Minimum debt payments also fall into this category.

That said, what qualifies as a “need” will vary from person to person. For example, if you commute long distances to work, then your car payment is an essential need — gas, too. Another person may live within walking distance from their workplace and the grocery store, so a car doesn’t factor into their budget at all.

If your current spending on needs exceeds 50% of your monthly take-home pay, take some time to evaluate if some of those expenses might be more “wants” than “needs.”

If this isn't the case and you simply have high fixed expenses, the 50/30/20 rule might not be the best budgeting model for you — and that's okay.

Wants: 30%

“Wants” are things you spend money on that are optional. This usually includes entertainment, dining out, travel, shopping, and hobbies.

It’s important to incorporate spending that brings you joy! The 50/30/20 rule is not about shaming you into ditching the avocado toast or those custom AirForce 1s. It’s about setting limits so that enjoying your life now isn’t at the expense of your future financial well-being. 

Savings and debt: 20%

The final 20% of your take-home pay should be dedicated to your savings goals and debt repayments.

What you consider “savings goals” and how you decide to repay your debt is based on your own financial objectives. Savings goals could be anything from growing an emergency fund to contributing to your 401k. The objective is to put money away for that particular goal.

Debt repayment (beyond the minimum payments) is also a priority in this category. The longer it takes to pay down high-interest debt, the more money you'll pay over time. Paying beyond the minimum ensures you’ll pay down your debt faster, freeing up more of your money once it’s paid off.

Two popular debt repayment strategies are the avalanche method and the snowball method.

• Avalanche method: You focus on high-interest debt first. You pay only the minimum amount due on all your other accounts and put as much money as possible toward the debt with the highest interest rate. As each account is paid off, the extra money goes to the account with the next highest interest rate. This method saves you the most money in the long run.

• Snowball method: You focus on paying off the smallest balance first. You pay only the minimum amounts due on all accounts except the one with the smallest balance. As each account is paid off, the extra money goes to the next smallest balance. This method can be the most motivating since you pay off accounts faster.

RELATED: How Much Should You Save a Month?

Defining Wants vs. Needs

When you’re new to budgeting, it can be difficult to distinguish between wants and needs.

After all, if you need to wear a suit to work, is shopping for clothes a need or a want? If having a gym membership is key to your mental health, is that a need or a want? It’s okay to make your best guess and readjust your buckets over time as you get a better handle on your budget.

After you plan out your categories, consider where you’re able and willing to cut corners. Maybe you’re open to moving to a cheaper neighborhood, but the thought of trading in your gym membership for YouTube workout videos is where you draw the line.

To work for you, a budget needs to be about balancing and accommodating your interests and preferences — you get to decide what’s essential for the 50/30/20 budget and what’s not. 

RELATED: How to Budget: 5 Simple Steps

Pros and Cons of the 50/30/20 Rule

Pros	Cons
Easy to use: You don’t need complicated calculations. Just write down your monthly income and expense categories, and use a budgeting app (or pencil and paper!) to track your spending.	Not detailed enough: If your money management issue is overspending, it can be hard to identify where this is happening since you’re not tracking individual expenses.
Flexibility: If your needs don’t account for 50% of your pay, or you want to save more than 20%, you can adjust the percentages. Maybe your budget is more like 60/20/20 or 40/30/30.	Inflation: As the cost of living goes up, your monthly income might not. Inflation makes it harder to afford what you need, and those expenses could exceed 50% of your after-tax income.
Encourages saving: Putting 20% of your after-tax income is a substantial savings rate, making this method ideal if you want to prioritize your savings goals.	For stable income: If you are self-employed or have an inconsistent income, your percentages may need to vary. You'll also need to calculate your taxes and include them in your needs category.

What To Do if You’re Not Ready for 50/30/20 Budget Rule

Maybe the 50/30/20 rule isn't compatible with your current financial situation. For example, your needs may be well over 50% of your net income due to high rent. Or, perhaps your income is unstable at the moment.

Here are some tips to help you prepare your finances to use the 50/30/20 rule:

• Reevaluate your needs and wants. Revisit your buckets. Over time, you may find that your philosophy about spending has changed. Expenses you first identified as “needs” may now be “wants,” or certain “wants” might be cut altogether.
• Increase your income. If you need to earn more money to cover your needs, find ways to increase your income, such as side hustles, setting up passive income streams, or taking on extra work hours.
• Pay off high-interest debt. By prioritizing paying off high-interest debt accounts, you can free up income that you can then redirect to either your savings, your needs, or your wants.

The great thing about the 50/30/20 budgeting rule is that it's easy to use once you’re ready. How you manage your money is ultimately up to you and should be based on the financial goals you set for yourself.

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