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The 50/30/20 Rule: How to Budget your Money more Efficiently?

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9 min read. Updated October 12, 2023.

When it comes to effective savings, there are countless methods and "rules" you can follow. The 50/30/20 rule of thumb is one of the most popular; and while the method is simple, it's very effective if you apply it properly and consistently.

Although budgeting can be difficult and frustrating to create and follow, the 50 30 20 budget plan is a great starting point for those looking to get their finances in order.  This concept has a lot of benefits and some drawbacks too, so you need to understand how it works to make the most out of it.

Keep reading to learn about this rule-of-thumb method and how it helps you save efficiently.

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What is the 50/30/20 budget rule?

The concept of the 50 30 20 budgeting rule is pretty simple. You divide your after-tax income into three different categories: 50% for Necessities/Needs, 30% for Wants, and 20% for Savings and Debt reduction.

The rule came from Senator Elizabeth Warren when she was writing her book "All Your Worth: The Ultimate Lifetime Money Plan". In this publication, she laid out the 50/30/20 budget method to help people get out of debt and start building wealth.

The book was co-written with her daughter Amelia Warren Tyagi, while Warren was still teaching at Harvard Law. In the end, their rule-of-thumb budget method really stuck and gained a following due to its simplicity. There are no spreadsheets, pivot tables, or heuristics to memorize.

Here's a quick breakdown of each category

  • 50% for Necessities

Necessities include all of your essential living expenses such as rent, food, transportation, and insurance. For example, if you earn $3,000/month after taxes, $1,500 should go towards your Needs. These are the expenses you cannot cut down on without major changes in your life.

Under this concept, if you're spending more than 50% of your income on Needs, it's going to be difficult to put money aside each month. Depending on how much you earn every month, this can be challenging for some people.

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  • 30% for Wants

Wants cover all the things that you would like to have but don't necessarily need. This could include eating out, traveling, clothes, entertainment, etc. If there's anything that you can live without, it would fall into this category.

It's important to note that Wants are not bad, you just need to be mindful of your payments in this category. With a paycheck of $3,000/month after taxes, $900 should be allocated to Wants.

  • 20% for Savings/Debt Payoff

This is probably the most important category because savings and debt freedom are critical to financial independence. The goal is to have at least 3-6 months of living expenses saved so that you're prepared for anything that comes up.

You could make provisions for a rainy day fund, retirement plan, or for projects such as getting a new car. Ideally, you should keep this money separated in a dedicated savings account.

The 50 30 20 budgeting method is great for developing saving habits.

One of the most famous personal finance quotes by Warren Buffet is “Do not save what is left after spending, but spend what is left after saving”. This means that, as soon as your salary hits your bank account, allocate 20 of your income immediately to your savings.

If you have a lot of debt, however, you may want to put more towards debt payoff each month. The goal is to become debt-free as quickly as possible so that you can start building wealth and follow the 50-30-20 budget plan. When you pay off high-interest debts, you save money in the long run because you're not paying as much interest to the bank..

So, with an after-tax income of $3,000/month, $600 should be for this category.

What is my after-tax income?

Your after-tax income is how much income you bring home after taxes are taken out, some call it 'take-home pay'.

To know how much money you can spend on Needs Wants and Savings, you need to understand how to calculate your net monthly earnings. You can use an online calculator to work out your income after tax, essential before using the 5030 20 rule.

How to use the 50/30/20 rule of thumb

A man keeping track of his savings and debt payments.

Once you calculate your monthly after-tax income, you figure out how much you need to spend on Necessities, Wants, and Savings each month.

You may need to adjust your spending in each category depending on your income and financial goals.  For example, if you want to save more money each month, you may need to spend less in your Wants category.

Be mindful of your spending and make sure that you're not breaking the bank in any category. If you find that you're struggling to stick to the budget, there are a few things that you can do:

●      Try to find ways to save money in each bracket. For example, If you're spending too much on travel, look for cheaper vacation options.

●      You could also try to make more money by picking up a side hustle or getting a better-paying job.

●      Automate your savings and regular expenses. This will help you minimize the temptation of spending money set aside for something else.

What types of debt should be considered in the 20% of savings and debt?

Only debt payments above minimums are included in the 20 of your income group. For example, paying off credit cards or mortgages for faster reimbursement falls under the 20% savings and debt repayment category.

But when you settle the monthly minimum loan payments only, this should instead go to the 50% Needs section.

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Why is the 50/30/20 rule important?

Finance experts believe that the 50 30 20 budget plan is a good way to manage expenses because it's easy to follow. It's also a good method to make sure that you're not overspending in any one category, or getting more credit card debt than you can afford.

The 50/30/20 budget strategy can help you reach your financial goals faster and more easily. For instance, if you want to build up money for a down payment on a house, you can adjust your budget to put more toward property provisions each month.

Also, if you happen to be out of a job, the 50-30-20 rule can help you stay afloat financially by falling back on your emergency funds until you find another one.

Drawbacks of the 50/30/20 budget principle

The 50 30 20 budget concept has been criticized by some because it can be too restrictive. They believe that the calculator doesn't allow for enough flexibility with how you spend money.

Another criticism of the rule is that it doesn't take into account a person's financial situation. For example, someone who has a lot of debt may need to put more towards debt payoff each month.

The 50/30/20 rule is also a very general guideline and may not work for everyone. Some people may need to adjust their budget depending on their income and financial goals.  And if you live in a high-cost area, it can be difficult to stick to a 50% allocation for necessities.

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Is the 50 30 20 rule right for you?

The 50-30-20 rule generally provides the best budgeting technique for most people. Whether it is a suitable solution for you varies according to your situation. The idea of only having three categories can make it a lot easier and more efficient to analyze your spending.

As with everything, the 50 30 20 rule is not a perfect plan. It is not an all-purpose way to budget or spend your money. Nevertheless, it is an easy-to-follow and effective way to begin your financial planning journey.

Flexible budgeting with a 30 20 10 rule

A man using savings category for his monthly budget.

The success of this budgeting technique is that anybody can adapt it to their personal financial situation and spending habits.

  • Saving less

For instance, for those who are self-employed, their monthly income may vary with a different paycheck each month. In this case, using the 50 30 20 budget rule of thumb may need to be adapted to their Needs Wants, and Savings to reflect their take-home pay.

You could then change the breakdown around and make your budget calculator into a 30 20 rule. This deliberately does not add up to 100% but would cover your needs for the month when your paycheck is much lower than usual. Indeed, in most cases, your debt repayment or credit card balance would still be taken out of your bank account each month regardless of your drop in income.

When you start this process for the first time, focus on building your emergency fund.

When you decide on the budgeting rule in line with your personal finance, remember to calculate and track your fixed monthly expenses in all categories such as health insurance, retirement contributions, 401 k savings, credit card, etc...


  • Saving more

On the other hand, those who have fewer issues with paying off debt or monthly income fluctuations could switch the three categories into a 50 20 30 rule. This puts a higher focus on saving when you can easily control your spending habits and live without some non-essential expenses.

If you can make your needs 30, adapt this budgeting method. When starting a retirement plan for the first time, you may reduce your spending at first, as you're redirecting some of your income towards your future life after work.

The 50/30/20 rule vs. other methods

There are a few other budgeting rules that you could try if you don't like the 50-30-20 rule.

One popular scenario is the envelope system. With this technique, you would put cash when you get paid into different envelopes for each category of spending. Once the money in an envelope is gone, you can't spend any more in that category.

This idea is particularly useful for those who prefer to pay by cash instead of cards in their day-to-day lives.

Another idea is the zero-based budget. With this system, you would make sure that your income minus your expenses equals zero. This means that you would need to find ways to save or make extra money each month to meet your budget.

The bottom line on the 50-30-20 rule

The 50 30 20 rule is perfect for those looking for a simple way to budget, or people not accustomed to budgeting. It is easy to keep finances under control with the 50-30-20 rule as it takes only three main classes to track budget details.

The 50/20/20 rule will not apply to everyone. However, you should remember that rules may be altered to suit your situation and budget.

No matter what budgeting system you use, the most important thing is to be mindful of your spending and make sure that you're aware of the steps to take toward your financial independence.


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No Financial Advice. This article does not provide financial advice and has been prepared without taking into account any person’s investment objectives, financial situation, or particular needs. 

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