What Is the 50/30/20 Budget Rule?

Following a budget can help you rein in your spending and work toward meeting your financial goals. The challenge is figuring out a system that you’re motivated to stick with – one that covers the necessities, leaves room for extras, and allows you to build a nest egg.

The 50/30/20 budget rule is one way to allocate your hard-earned dollars. Its premise is that you assign percentages of your monthly take-home pay to three corresponding buckets:

• 50% for needs.
• 30% for wants.
• 20% for savings.

The percentages are guardrails to help you cover your essential costs, enjoy life, and build financial security. While you don’t want to fool around with reducing the savings bucket below 20% (more on this below), it’s up to you whether to fiddle with your mix of needs and wants.

For example, if you live in a high-cost area, you may find earmarking 60% for needs (high rent or mortgage payment) and 20% for wants makes more sense. Or if you’re determined to retire early, a lifestyle that reduces your needs and wants to a total of, say, 60% would enable you to earmark 40% of your pay today for savings.

Here’s what to consider and how to divvy up your income using the 50/30/20 budget rule. (For another budgeting approach, read “What Is Zero-Based Budgeting?”)

First, let’s start with a closer look at the three budget buckets and what they represent.

Needs: These are the essential costs you must cover every month to function. This will likely include rent or mortgage, utilities, insurance premiums, groceries, and required debt payments, such as for student loans and credit cards. For the latter, it’s financially smart to pay your balance in full each month.

Wants: These are the nice-to-haves that, if you’re totally honest, you can live without. Eating out is a want; cooking at home fulfills the need for sustenance and will typically cost less. A plane ticket for a vacation is a want; some may argue a vacation is, too. Still, a staycation or a destination within driving distance can provide that much-needed break without blowing your budget.

Savings: The savings portion of your budget comprises two core elements: emergency savings and retirement savings. Building an emergency fund that covers three to six months of your living expenses offers you the financial peace of mind that you’ll be able to handle whatever costly curveballs come your way, such as an unexpected health-related expense or a layoff. 

Saving for retirement so that you have enough money put away to live the life you want once you stop working is also a smart idea. Financial pros recommend saving at least 15% of your take-home pay in retirement accounts – such as a workplace 401(k) or an Individual Retirement Account (IRA) – assuming that you began doing so by age 25. If you started later, you might want to consider saving a higher percentage of your take-home pay for retirement.

Additional savings goals you may have are for a down payment for a home or a college fund for your kids. That’s all good but continue to prioritize retirement savings and build your emergency fund. Additional savings should come after fulfilling those two bedrocks of financial security.

With a better understanding of the three buckets, it’s time to pull up a few months’ worth of bank and credit card statements and group your spending accordingly.

Next, add up each bucket and then divide their sums by your total monthly take-home pay. For example, let’s say your take-home pay is $5,000 and you spend $3,000 a month on needs, $1,800 on wants, and $200 goes to savings. That means your needs account for 60% ($3,000/$5,000) of your monthly cash flow, your wants consume 36% ($1,800/$5,000), and the remaining 4% ($200/$5,000) goes to savings.

Using the 50/30/20 rule, you can see spending on needs and wants is higher than they should be and at the significant expense of savings. Now comes the challenge of figuring out what you can possibly sacrifice in order to boost your monthly savings to 20% of take-home pay.

When determining how to reallocate your budget, it’s natural to skip right past what you spend on needs. After all, those items are non-negotiables, right? Well, if you’re serious about building financial security, you will subject your needs bucket to a clear-eyed review to see where you might be able to spend less.

For instance, let’s say you need a car to get to work. Understood. But what kind of car are you driving? New or used? Were you swayed by heated leather seats and a double-panel moonroof, or were you satisfied with the basic package? Average monthly car loan payments tend to be lower for a new car than for a used car.¹ That monthly could go toward savings.

Then there are housing costs, which typically take the biggest bite of our budgets. But you do have options. If practical, would a move 15 minutes further from your favorite neighborhood cut down your monthly rent or mortgage payment? Is downsizing an option? Of course, moving has its own costs, so it’s advisable to figure those out first to make sure it’s worth the effort.