Build a Budget: What is the 50/30/20 Rule?

There are many different types of budgets around today, for any type of spender or saver.  Almost everyone has a tip or trick they use as a goal to manage their finances and ensure they’re achieving their personal savings targets.  But not all budget plans are created equal.

If you’re like me, you’ll scour the internet trying to find a better structure for your money.  Your personal budget is incredibly important, and you want to make it both feasible and helpful so that you end up saving money and paying down debt.

When the rubber hits the road, a true budget plan is about establishing a goal and pursuing it, not just having a detailed ledger of where your money is going.  It’s all well and fine to know the details of your spending, but without directing the budget towards something, your effort is wasted.  The 50/30/20 plan does just that.

The premise is very simple, and that is where its strength really lies.  At the heart of it, the plan states that you should spend 50% of your take home pay on needs, 30% on wants, and put 20% towards debt payments or savings.

What is the 50/30/20 rule?

Let’s dive into what this plan really states.  The 50/30/20 plan was popularized by now Senator Elizabeth Warren and her daughter in their book All Your Worth: The Ultimate Lifetime Money Plan, though it is hard to trace the exact origin of its development.

This plan earns its salt by fitting your spending into 3 large, overarching buckets that are easy to track, remember, and manipulate.  The catch is knowing what truly falls into each bucket and how to reach the point where you are using it properly.

This rule isn’t for everyone.  There are some people who are trying to dig themselves out of massive debt (student loans, bankruptcy, medical bills) or trying to set themselves up to retire at 45.  But, if you are a normal individual with fairly typical debts and obligations, this plan is perfect for you.

The plan goes as follows:

  • 50% of your take home pay should go towards paying for necessities and financial obligations.  We’ll examine what those obligations are in a little bit.
  • 30% of your pay should go towards wants and additional items.
  • 20% of your take home pay should go towards paying off debt or saving for the future.


A little bit deeper…

50% for your needs…

The needs and financial obligations checklist is everything you need to survive.  Think about it this way: if you had a catastrophe or lost your job, these are the things that you can’t stop paying and need to keep up in order to survive.  The list includes different things for each person, but the following are some of the most common:

  • Mortgage or rent
  • Utilities
  • Groceries (only the necessities, not that extra pack of Swiss Cake Rolls you snuck into the cart)
  • Car and transportation costs (including gas and maintenance)
  • Minimum debt obligations (such as the minimum payment on your credit card or student loan installments)

30% for your wants…

This is one of the areas of lenience and fun.  It’s hard to think of a budget as encouraging fun and frivolity, but this plan does just that – laying out a specific portion of your budget for things that you want to do so you can still enjoy your life.

  • Clothes
  • Eating out
  • Nonessential foods (like that bottle of Moscato you can’t help but put in the cart)
  • Gym membership

20% for debts and savings…

This portion will also look different depending on your financial situation.  If you’re trying to dig yourself out of a financial pit, you may be putting all 20% of the budget towards your credit cards.  If you’re just trying to start building wealth and you have your debts in check, then you can drop the money straight into a high interest savings account or something similar.

Remember, minimum debt payments are already included in the financial obligations section, so the debt payment from this additional area will be extra payments on top of the minimum.

Why the 50/30/20 rule can work

To put it simply, it’s a strict budget that allocates things where they’re needed the most, while giving you wiggle room within those buckets.  Surveys have shown that the median American household spends roughly 90% of their pretax income on their needs and wants, which leaves a minuscule portion, if any, for their debts or saving.

By focusing on what you take home after taxes and then separating that out to workable numbers, you create a budget plan that is effective and manageable while also being aggressive with debt and savings.  Don’t be fooled though, it is certainly a strict budget.

For a general sense to compare, let’s look at an average family with $75,000 annual income.

Before 50/30/20

  • 90% of pretax income is going towards wants and needs – $67,500
  • Typical tax rate means that take home pay is roughly 80% – $60,000
  • Leaving $7,500 in extra debt annually, without considering interest

After 50/30/20

  • Take home pay is roughly 80% – $60,000
  • 50% for needs – $30,000, or $2,500 a month
  • 30% for wants – $18,000 or $1,500 a month
  • 20% for paying off debt or saving – $12,000 or $1,000 a month

At the end of one year, the 50/30/20 family has saved $12,000 while the other family has gone $7,500 into debt.  That’s a nearly $20,000 swing!


Building your 50/30/20 budget

Let’s take a look at building your very own 50/30/20 budget. For examples, we’ll assume you’re making $75,000 from the case above.

Calculate your take home pay

Figure out what you end up with in your paycheck after taxes, healthcare, and other items are removed.  You can choose to include healthcare deductions and retirement contributions if you have them and want to go a little deeper.  For the sake of argument, however, we’ll just assume that once everything is taken out, you’re left with 80% of your annual income.

Reduce your needs to less than 50%

This is the first penny-pinching area.  Take a look at all of your needs.  I’d suggest grabbing a pen and paper, or making a spreadsheet if you feel so inclined.  Dig through your finances and start figuring out what you need to pay.

50% of your annual budget will be $30,000 (take home pay).  This means you will have $2,500 a month to spend on necessary payments.

Let’s assume you have the following necessary expenses:

  • $1,500 mortgage payment
  • $250 minimum payments on credit cards and debts
  • $125 electric bill
  • $75 water bill
  • $200 gas and car care
  • $550 groceries

This comes out to $2700, which is higher than you can afford to be spending.  You need to reduce $200, and you can achieve that in a few ways.  First, you may be able to trim a bit out of your grocery bill with coupons or more diligent shopping methods.  Additionally, you may want to consider trading in your car for one that gets better mileage, or seeing if you can work from home occasionally.

An additional option for you is to consolidate some of your debt with a loan.  These can reduce your minimum payments and get you a lower interest rate.  By consolidating the debt payments, you may be able to get an additional $100 out of the needs column.

Minimize your wants to below 30%

This part is not as technically difficult as the first part, but it is the most painful.  The wants portion of our budget is the area that gives us the lifestyle we want to have.  Remember, though, that setting a good budget is all about living below your means.

Take a hard look at the coffee you buy every week on the way to work, or the gym membership that you use sporadically.  Are these items you’re willing to sacrifice?

Remember, though, that you don’t have to sacrifice certain things if you don’t want to.  This is all about prioritizing.  Maybe you really do want to get coffee on the go before work, because it’s a special treat.  That’s fine if it’s your priority, but something else will have to go.

One area that shows some great success is with going out, either with friends or for date nights or something else.  There are many ways to get creative with outings and events to maintain your budget.  If you don’t want to give it up altogether, or you like the places you typically go, set a budget or a limit on how often you go and stick to it.

20% for savings and paying off debts

Start paying down your debt and establishing savings.  As soon as you have the free money to do this, you should start putting this money where it matters.

There are two main points I want to reinforce for you.  First, debt is wasted money.  It is a negative return on investment.  Any money you have sitting on a credit card costs you every month.  Pay it off quickly.  Do you have a zero-interest term on your credit card?  That’s great!  But it’s still a bad investment.  The money that is on that card needs to be paid at some point, and instead of paying it to some corporation, you could be investing it and making money off of it, instead of simply not losing money off of it.

The second thing I want to reinforce is that you need emergency savings.  Most people will say over and again that you should start putting money towards your debts before doing anything else.  I disagree, but I don’t think you should wait long to put money towards them.

You need a minimum of $500 in money that you can access quickly.  That will prevent you from going further into debt later.  Fortunately, in our example, you will be able to put down $500 for savings, and then an additional $500 towards debt in your first month.

Once you’ve paid off your debts, you can start putting your money into your retirement fund or in some other investment vehicle.


When will the 50/30/20 rule not work?

There are a few cases where the 50/30/20 rule will not actually be practical.  For the average American, it will be a great tool.  But sometimes, it’s not the best.

For the person who is paying off very large sums of money, you will need to put more than 20% of your earnings towards your debt.  This is unfortunate, but it’s often necessary.

On the other hand, for the person trying to establish themselves as financially independent, they may want to put more than 20% towards savings and investing.  By doing this, they minimize their spending on needs so they can live on less, and they invest more heavily so that their money produces for them even better.

What to do if you need more money for your budget

What if it’s more feasible to expand your budget than to shrink your expenses?  For some people, you may be unable to pay for your mortgage, car payment, gas, utilities, and groceries with only 50% of your earnings.

Well, the alternative to reducing your spending is increasing your earnings.  There are several ways you can do that.

  • Ask for a raise – make the most out of the job you currently have
  • Take on extra work – either you or your spouse, if you’re married, can try and get a better or job or get back into the workforce
  • Get a side hustle – make your free time work for you by developing your talents into a money making venture

Final thoughts on the 50/30/20

This budget plan is a great starting point for steering your spending in the right direction.  Hopefully, however, it is just the start to an evolving adventure of financial independence.

Eventually, you’ll want to reduce your spending and increase your earning even more, so that you can put significantly more than 20% of your income into savings.  If you look at the most financially independent people, they have long since transcended this rule, and are living off of a significantly smaller portion of their income.

As you become more financially literate and stable, you’ll find ways to improve your budget and gain more freedom every day.

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