What is the 50/30/20 budget rule?

Quick insights

• The 50/30/20 budget rule is a framework that allocates 50 percent of your monthly budget for needs, 30 percent for wants and 20 percent to goals.
• These figures are based on your take home pay after taxes.
• Budgeting this way may help you build up savings, pay down debt or a combination of the two.

Budgeting your money can be a useful way to build a solid financial foundation and smoothly handle any unexpected financial challenges. There are many ways to organize your expenses into a budget.

The 50/30/20 rule provides a framework for dividing your resources into three main categories: your wants, needs and financial goals. Below, we take a closer look at this method and how it works

The 50/30/20 rule explained

The 50/30/20 rule is a budgeting principle that categorizes your expenses into three buckets, with each bucket getting a different percentage of your take home pay. With this method:

• 50% of income goes to needs
• 30% of income goes to wants
• 20% of income goes to goals

Let’s examine these three categories.

Needs: 50 percent of monthly income or less

Needs are your essential expenses. These are line items in your budget you might pay every month, like your living expenses. Some examples include:

• Housing
• Utilities, including your internet and phone bills
• Groceries
• Transportation costs, including car payments and gas
• Debt payments, like student loans and credit cards
• Insurance
• Healthcare

The amount you allocate for necessities may change over time, but the goal with this method is to try not to exceed 50 percent of your budget.

Wants: 30 percent of your monthly income

Defining wants tends to be less straightforward. Wants-based expenses are not essential; rather, they are tied to your lifestyle and what you may choose to spend money on.

Clothing is one example. While everyone needs clothes, not everyone requires designer or luxury items. These items would be considered a want.

Wants expenses can include:

• Dining out
• Sporting events and concerts
• Streaming or subscription services
• Electronics
• Vacations
• Hobbies
• Gym memberships

Expenses in this category may enhance your enjoyment. However, since these wants can often tempt us to spend more, it’s generally a good idea to aim for them to take up no more than 30 percent (or less) of your budget.

Goals: 20 percent of your monthly income

Following a budget may help you plan day-to-day expenses. However, it’s a good idea for budgets to also take future needs into account. That’s why the final 50/30/20 bucket is dedicated to goals.

Financial goals vary between individuals. However, many people choose to allocate a percentage of their take home pay toward savings and debt payoff goals.

A few examples of goals-based expenses include:

• Building an emergency fund
• Saving for a long-term goal, like a down payment on a house or car
• Contributing to retirement accounts

You may remember that debts are a part of the needs category as well. “Needs” debts represent the minimum payments you need to make on any debt. If you plan to pay down or pay off a debt sooner, the excess amount you put toward that debt would be included in your goals bucket.

Tips for building your budget

The 50/30/20 budget rule is based on your take home pay. When you are calculating your 50/30/20 percentages, the amount you are dividing is your total income minus taxes. If you have additional income from a hobby or freelance job, you could include the amount you net after taxes from this income as well.

Calculating all of your expenses may be the most time-consuming part of creating your budget. You have to know what your expenses are before you can categorize them as wants, needs or goals.

You may have a mix of:

• Fixed expenses: Expenses that occur every month at a set amount, like rent
• Variable expenses: Expenses that occur every month at a different amount, like groceries
• Periodic expenses: Expenses that do not happen regularly, like a car insurance payment

To assist in managing your expenses, you may be able to review your bank statements or use a budgeting app or tool that can help you sort and categorize your expenses. It will be up to you though to determine what is a want, need or goal—because every budget is different.

Let’s say that your needs only make up 40 percent of your budget. Would you rather the remaining 10 percent be put towards wants, goals or a combination of the two?

Benefits of the 50/30/20 rule

There are a few benefits to the 50/30/20 budget rule. It provides a clear and straightforward framework for budgeting, which may make it easy for beginners to start managing their finances. The 50/30/20 framework encourages balanced spending by allocating funds to both immediate needs and future financial security.

It also:

• Prioritizes necessary expenses
• Puts guardrails on discretionary spending (e.g. wants)
• Emphasizes the importance of financial goals

Creating a budget that’s easier to follow may also help you achieve greater long-term financial success and more peace of mind in the present.

Drawbacks of the 50/30/20 rule

Not every budgeting method will work for everyone—and the 50/30/20 budget is no exception. For example, if your fixed expenses exceed the 50 percent threshold, then the 50/30/20 percentages may not work for your circumstances.

Individuals who have set aggressive goals to tackle debt or save for retirement may find this framework does not fit their financial plans either.

Alternatives to the 50/30/20 rule

The 50/30/20 rule is one budgeting method, but there are others. Some other common budgeting methods include:

• Zero-based budgeting: In a zero based budget, your income minus your expenses totals to zero, giving every dollar earned a purpose. However, this method involves meticulously planning for every expense.
• Cash envelope system: The envelope budget system is a way to budget where cash is allocated into different envelopes, each labeled for a specific spending category like groceries, entertainment or bills.
• Pay-yourself-first rule: With this rule, you contribute toward your goals at the beginning of the month before you pay your bills, and then you can spend the rest of that month’s income as you wish.

In summary

It’s up to you to determine which budgeting method works best for you. If you’re looking for a simple framework that accounts for your wants, needs and goals, the 50/30/20 budget method may work for you.

But a budget that works for you in the present may not work for you forever. As your financial picture changes and evolves, you may want to try different budgeting methods. Regardless of which budget you use, having a plan for your money and sticking to a budget may help you better handle your spending decisions and plan for the future.