Smart personal finance is about balancing needs, wants and saving for the future. The 50/30/20 budget is a memorable rule-of-thumb that can help you do all three.
The 50/30/20 rule explained
The 50/30/20 budget was reportedly conceived by Senator Elizabeth Warren and her daughter Amelia Warren Tyagi in their book, All Your Worth: The Ultimate Lifetime Money Plan 💰 , which they co-wrote back when Warren was still teaching at Harvard Law.
The 50/30/20 budget is based on after-tax income and stipulates that spend:
- 50% of your income on needs
- 30% of your income on wants
- 20% of your income on savings
The method gained popularity for its simplicity. There are no spreadsheets, pivot tables, or heuristics to memorize — just three simple numbers. As long as you keep those three numbers in mind throughout the month, you’ll budget pretty effectively.
50% for needs
Needs are mandatory expenditures that you simply can’t skip. Things like groceries, rent, childcare — you know, “adulting” stuff.
Here’s a general list of spending categories that fall into the needs bucket:
- Rent/mortgage
- Utilities
- Insurance premiums (auto, home, medical, etc.)
- Groceries
- Transportation (gas, bus fare, etc.)
- Wi-Fi and mobile data plans
- Therapy and mental health services
- Gym membership (debatable, since there are free ways to exercise)
30% for wants
The middle spending category goes to “wants” — things that might make life better, but that you don’t necessarily need to pay for each month.
Things that fall into the wants category include, but certainly aren’t limited to:
- Restaurants and takeout
- Entertainment and media subscriptions (Twitch, Netflix, etc.)
- Travel
- Concerts and movie tickets
- Online shopping
- Fashion
- Video games and consoles
- Alcohol
Get the gist? And yeah, sometimes it can be hard to distinguish between a “want” and a “need.” We’ll talk more about that in a bit.
For now, let’s talk about the last category of the 50/30/20 budget: Saving.
20% for savings
Everybody always asks me what percentage of their income they should be saving each month. The answer is right here: At least 20 percent. Most people will think of saving as diverting money into a savings account. But you can count any of the following as savings:
- Contributions to a 401(k) or IRA
- Money deposited into savings accounts or certificates of deposit
- Other investments
- Extra debt payments above the monthly minimum due
50/30/20 budget example
Let’s say you take home $4,000 a month after taxes. Here’s a breakdown of what a 50/30/20 budget would look like.
$4,000 x 50% = $2,000 for needs
- $1,400 for rent and utilities
- $250 for groceries
- $150 for mental/physical health expenses
- $100 for mobile data and Wi-Fi
- $100 for gas
$4,000 x 30% = $1,200 for wants
- $400 for restaurants and takeout
- $350 for shopping
- $250 for entertainment
- $200 for vacation savings
$4,000 x 20% = $800 for savings
- $400 into your 401(k)
- $250 into other long-term investments
- $100 into your emergency fund
- $50 into speculative investments (crypto, individual stocks, etc.)
50/30/20 budget calculator
What if you can’t save 20%?
If you can’t save anywhere near 20% of your income, you’re not alone. Despite all of the advantages to living in the United States, our economy makes it harder and harder for most Americans to get ahead. Housing, food, education and healthcare cost WAY too much and jobs pay WAY too little. Add in a culture that worships consumerism and makes everyone feel like they need the newest iPhone and you’ve got a recipe for financial disaster.
The 50/30/20 budget may also be growing out of date. It was conceived in 2006 when the median rent in the United States was around $950. Today, it’s $2,000 and our cost of living continues to outpace wage growth.
You can change the numbers! I heard someone propose that the rule should be updated to 60/30/10 as housing and other needs get more expensive. That makes sense to me. You can play with ratios to arrive at a budget that works for you as long as you’re making saving a priority. On the other extreme, if you’re very frugal you might live on a 50/20/30 budget.
Pros and cons of the 50/30/20 budget
Pros
- It’s simple. Some budgeting methods call for complex spreadsheets, pivot tables, and more. But a 50/30/20 budget can be worked out quickly.
- It’s compatible with budgeting apps. Many modern budgeting apps have a 50/30/20 option already baked in, so you’re just taps away from holding yourself accountable with notifications, tracking, and more.
- Saving 20% is aggressive, but extremely effective. Here’s a TL;DR of my article How the Rich Get Rich (and How You Can, Too!): Just save 20% of your income for 30 years and you’re golden. The 50/30/20 budget aligns with that strategy perfectly.
Cons
- 50% may not cover your needs.
- It can be hard to distinguish between wants and needs. Is hiring a personal trainer a “want” because it’s unnecessary? Or a “need” because it’s tied to your physical and mental health? 50/30/20 budgeters have to face these questions often.
- It’s not designed for debt structuring. As illustrated above, the 50/30/20 budget just wasn’t designed with debt repayment in mind, forcing folks to awkwardly shoehorn their debt into the 20% saving category.
- It’s not ideal for parents. As any parent knows, the costs associated with childcare are both high and unpredictable. You may find that raising children pushes your needs bucket to 60% or even 70%.