If you’re looking for a way to budget that can help you save money and more effectively manage your finances, consider the 50 30 20 budget rule. It can be a great tool to see where your money is going each month, helping you make changes where needed. If you find budgeting challenging, using the 50 30 20 rule is a good place to start as it keeps things simple while helping you prioritize saving and paying off debt.
What is the 50 30 20 budget rule?
The 50 30 20 rule is a form of budgeting that splits your monthly, after-tax income into three major categories: necessities, wants and savings.
50% — necessities
Allocate 50% of your income towards necessities. These are expenses that you just can't avoid. They include items such as:
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- Housing
- Utility bills
- Food
- Transportation
- Child care
- Insurance (car, home, life)
30% — wants
Since life would be miserable if you didn't have a few splurges every once in a while, budget 30% of your take-home income towards “wants.” This category obviously includes all non-essential purchases.
- Subscription streaming services, such as HBO Max (opens in new tab) or ESPN Plus (opens in new tab)
- Vacations
- Dining out
- Theatre, concerts, sports matches
- Leisure goods, luxury household items, apparel
20% — savings
The remaining 20% of your income should be put in savings, whether it's longer-term savings — your retirement account — or for more short-term savings needs e.g. a rainy day fund, or to pay off any debt you have.
While this section makes up the smallest portion of your overall income, it's the most important. Although you should nearly always pay off debt first if you're unsure whether or not to prioritize saving or paying off balances, consider interest rates on any debt you have. If interest rates on that debt are high, it's usually recommended to put all 20% towards paying off that debt. However, if your debt interest rates are fairly low, consider putting 10% towards savings and using the remaining 10% to make payments against debt.
Search for the best savings rates using our tool in partnership with Bankrate, which will help you find the best rates that are also FDIC or NCUA-insured.
Example of a 50 30 20 budget
Here’s an example of budgeting using the 50 30 20 rule.
If you bring home $5,000 after-tax a month, according to the rule you'd split your income as follows:
- $2,500, 50% of your income, is allocated towards necessities — rent, utilities and groceries.
- $1,500, 30% of your income, is allocated towards things you want, whether it’s the latest iPhone or a fresh outfit.
- $1,000, 20% of your income, is set aside for saving or for paying off debts.
If you have low-interest debt, you might consider putting 10% ($500) towards an emergency fund and another 10% towards a personal loan.
Bottom Line
Overall, the 50 30 20 rule is a simple guideline for budgeting, but it may not be the right fit for everyone’s financial situation. For example, you may have a lot of expenses to pay each month, that take up more than 50% of your monthly income, leaving little to allocate towards "wants" and savings. However, it can be a useful framework for individuals who prefer a structured approach to budgeting.
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