Are you looking for the perfect way to budget but still failing? Don’t worry, we have brought you the most effective solution to help you save money and investment. This rule is known as 50/30/20 rule. It will allow you to develop a detailed budget, though managing it can be complex.
What Is the 50/30/20 Rule?
The 50/30/20 rule basically splits your income (after taxes) into three parts. You use 50% for your needs, 30% for your wants, and 20% for your savings. U.S. Sen. Elizabeth Warren made this idea popular in her book All Your Worth: The Ultimate Lifetime Money Plan. It’s a simple way to plan your budget so you can reach your money goals.
50%: Needs
Needs are the things you must pay for—your essential bills and living costs. This includes expenses like rent, groceries, and insurance. If you find that more than half of your income goes to needs, you might need to cut back on extras or choose a simpler lifestyle. For example, you might move to a smaller home or choose a more affordable car.
Examples of needs include:
- Rent or mortgage payments
- Car payments
- Groceries
- Health care and insurance
- Minimum debt payments
- Utilities
Cover the Essentials
Spend half your income on essentials you can’t live without. This includes housing, utilities, groceries, transportation, and insurance.
30%: Wants
Wants are the things that make life more enjoyable but aren’t necessary for survival. This could be eating out, cable TV, or buying the latest gadget when your current one works fine. Even choices like driving a luxury car instead of a basic one count as wants.
Examples of wants include:
- Trendy clothes or accessories
- Tickets to sports or concerts
- Vacations or leisure travel
- Upgraded electronic devices
- Expensive internet service when a basic plan would do
Enjoy Life Within Limits
Use 30% of your income for non-essential spending — the fun stuff like dining out, streaming, hobbies, shopping, and vacations.
20%: Savings
The final 20% of your income must go toward savings or paying off extra debt. It’s smart to build an emergency fund with at least three months’ worth of expenses, so you’re prepared if something unexpected happens. After that, focus on saving for long-term goals like retirement.
Examples of savings include:
- Building an emergency fund
- Adding to a retirement account (like an IRA)
- Saving for a future home or investment
- Paying extra on your debts
If you ever need to use your emergency fund, try to refill it with any extra money you earn.
Secure Your Financial Future
Put 20% of your income toward your future. This could include emergency savings, investing, retirement accounts, or paying off debt faster.
Importance of Savings
Many people in the U.S. struggle to save money, and debt is common. In fact, the average personal savings rate was only 3.4% in June 2024. The 50/30/20 rule is developed to help you set aside money for emergencies and retirement. Having a safety net is very important in case you lose your job or face unexpected expenses. One reason people struggle to save is lifestyle inflation, where increased income leads to increased spending instead of saving. Saving for retirement is also crucial because people are living longer, so planning early can help you enjoy a secure future.
In June 2024, the average personal savings rate in the U.S. was just 3.4%. The 50/30/20 rule can help you build a financial safety net before unexpected events strike.
Benefits of the Rule
The 50/30/20 rule offers multiple advantages like it is.
- Easy to Follow: The rule is simple, making it easy to split your income without complex math.
- Balanced Spending: It ensures you cover essential costs, enjoy some extra spending, and save for the future.
- Focus on Essentials: By setting aside 50% for needs, you make sure that your important bills are paid first.
- Savings for Goals: Allocating 20% for savings helps you build an emergency fund, save enough for retirement, and work toward long-term goals.
- Flexibility: You can adjust the rule to fit your income and living situation if needed.
How to Adopt the Rule
There is no one perfect way to budget, but these tips can help you use the 50/30/20 rule:
Example
Imagine Bo, a recent college graduate who just started their first full-time job. Bo decides to use the 50/30/20 rule to manage their money. After tracking expenses for a month, Bo finds that their after-tax income is $3,500.
Bo’s Budget Breakdown
Needs (50%): $1,750 – Rent, groceries, bills
Wants (30%): $1,050 – Entertainment, dining out
Savings (20%): $700 – Retirement, emergency fund
Bo even sets up automatic transfers for savings. Later, when Bo gets a raise, they review and adjust the budget—perhaps by cutting back on some expenses like high transportation costs through carpooling.
The Bottom Line
Saving money can be tough, and unexpected costs can pop up at any time. The 50/30/20 way actually gives you a clear plan for using your after-tax income. It helps you cover your basic needs, enjoy some extra spending, and set aside money for emergencies and retirement. With a good plan, you can manage your bills, save for the future, and still enjoy life.
The 50-30-20 rule is just one way to consider organizing your budget. Consult a professional financial planner to find the perfect fit for your situation.
FAQs
Yes, you can change the percentages if you need to. If you live somewhere expensive or have bigger saving goals, feel free to adjust the numbers.
No, the rule is based on your income after taxes. Use your net income when planning your budget.
Start by tracking your spending, focus on your essential costs, limit extra spending, and always set aside money for savings or extra debt payments.
Absolutely. You can use part of the savings (20%) to build a fund for long-term goals like a down payment on a house, education, or investments.
