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

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

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.

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. Saving for retirement is also crucial because people are living longer, so planning early can help you enjoy a secure future.

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:

Track Your Expenses:
Keep a record of your spending for a month or two. This will help you see where your money goes and how it fits into your needs, wants, and savings. You can use a simple spreadsheet or a budgeting app.

Understand Your Income:
Know the difference between your gross income (what you get before taxes) and your net income (what you actually take home). Use your net income to set up your budget.

Identify Your Critical Costs:
List your must-pay expenses like rent, utilities, groceries, transportation, insurance, and debt. These are your top priorities and usually make up the largest part of your budget.

Automate Your Savings:
Try to set up automatic transfers from your account to your investment or savings accounts on payday. This way, saving happens without extra effort.

Maintain Consistency:
Stick to your budget each month. Adjust your plan as needed when your income or expenses change, but try to follow your set percentages as closely as possible.

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.

  • Needs (50%): Bo spends about $1,750 on rent, utilities, groceries, transportation, and student loans.
  • Wants (30%): Bo uses $1,050 for dining out, movies, and other fun activities.
  • Savings (20%): Bo sets aside $700 for retirement and future goals.

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.

Can I Change the Percentages in the 50/30/20 Rule to Fit My Circumstances?

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.

Should I Add Taxes to the Calculation of the 50/30/20 Rule?

No, the rule is based on your income after taxes. Use your net income when planning your budget.

How Can You Budget Practically Using the 50/30/20 Rule?

Start by tracking your spending, focus on your essential costs, limit extra spending, and always set aside money for savings or extra debt payments.

Can I Use this Rule for Long-Term Objectives?

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.