How (and Why) to 50/30/20 Your Money

There’s no shortage of advice on how to manage your money. But if you want to create a budget that helps you achieve your financial goals while also giving you room to actually live your life, then the 50/30/20 plan may work for you.

This budget program is an easy way to figure out how to spend your money by categorizing all of your expenses into three simple categories: needs, wants, and savings (or debt payoff). Here’s a step-by-step guide to see how the process works and who it’s best for.

What is the 50/30/20 Rule?

The 50/30/20 rule uses these three percentages to budget your after-tax income on a monthly basis. Take a look at your total paychecks for the month to determine exactly how much cash you’re working with, once taxes are deducted by your employer. 

If you have any pre-tax withholdings, such as 401(k) contributions or healthcare payments, include that money as part of the income considered for the 50/30/20 rule. Once you have your total after-tax earnings figured out, it’s time to make your budget. 

Needs = 50% of Your Budget

Start off by calculating what half of your monthly income amounts to. This number is assigned to the largest budget category: your needs. Truly look at your expenses to determine what qualifies for this category. Each expense should be something that directly contributes to your livelihood.

These major staples include things like your rent or mortgage, health insurance, medications, car payments and insurance, gas, and student loans. Basic utilities like your electric bill should be on the list, but not your tricked-out cable package with HBO and Showtime. 

Another “need” to include in your calculation is your minimum debt payments for credit cards and personal loans. Your credit score will take a huge nosedive if you don’t prioritize those payments, plus you’ll end up accruing expensive late fees.

Groceries should also count towards this category, but since it’s a discretionary amount (meaning you can mostly choose how much you spend at the store), wait until you’ve added everything else up to help you set this number.

For example, if 50% of your income comes to $2,500 and all of your needs other than your food come to $2,000, you then have $500 left in your monthly budget to spend at the grocery store. Depending on the size of your family, this remainder could feel like a lot or a little. If your grocery budget feels strained, think of other ways you can save on your necessities, like carpooling to work or refinancing a high-interest loan.

Wants = 30% of Your Budget

Next, take 30% of your after-tax income and assign to things you want throughout the month. This covers a wide range of expenses, including your streaming subscriptions, dining out, and clothing (beyond the basics, anyway). If you have kids, this category also accounts for things like soccer cleats, ballet lessons, and field trip fees. You can see how your “wants” can really start to add up, even when devoting 30% of your income. 

It’s ok if you’re currently spending more than 30% of your income on non-necessities. If this is the case for you, start reining in your spending by looking at your lifestyle and responsibilities.  Prioritize the things that are the most important to you, whether it’s going out to a nice restaurant with your friends a few times each month or paying for the premium gym membership for your daily workout. 

From there, you can see how much money is leftover in your 30% budget to cover the things that are less important to you. Maybe you drop off a few subscription boxes or limit the number of times you eat out throughout the month. Most people have continuous culprits that leak money from their budgets.

This strategy of only spending 30% on wants can also help guide your future purchases. Even though your existing car payment is considered a need, for instance, upgrading to a luxury vehicle definitely falls within the “want” category. Before you take the plunge on any additional expenditure, see how it fits within this category of your budget. It’s a great way to figure out just how easily you can afford new purchases in your life.

Savings/Debt Payoff = 20% of Your Budget

The final category of your 50/30/20 budget is your savings and/or debt payoff plan. Take the remaining 20% of your monthly income and determine how to allocate it between savings and debt. When referring to debt, we mean high-interest debt like credit cards and personal loans. If you’re passionate about paying off less expensive debt, such as your student loans or car payment, you can also include those extra payments in this category if you wish.

How do you prioritize the different types of savings and debts? 

Start off with an emergency savings fund. This account should total three to six months of your monthly needs. Since you already have that amount figured out, it should be easy to determine your goal here. Begin setting your extra money aside to build your emergency buffer in case you lose your job, have an unexpected medical bill, or need a large home or car repair. After all, these things happen to all of us.

If you want to pay off your debt, next allocate a set amount to achieve that goal. Using a debt payoff calculator can be especially helpful when figuring out how long it will take you to pay off revolving debt like a credit card.

Another important component of your savings plan is your retirement fund. If you have access to a 401(k) at your job, find out if your employer offers a match and contribute what you can to take advantage of this perk. Another option is either a traditional or Roth IRA, both of which come with different tax benefits and annual contribution limits.

You can also devote a portion of your 20% to shorter-term savings goals such as a vacation, a wedding, or your children’s future college tuition. 

Who the 50/30/20 Budget is Best For

The 50/30/20 plan is beneficial in a number of situations. If you’re an absolute beginner budgeter and have no idea how to start organizing your finances, this model can be a great jumping off point. It gives you clear guidelines and minimizes the amount of detailed analysis you have to do because there are just three simple math equations to complete.

This process also helps you adjust spending when you have changes to your income, whether you start earning more from a raise or take a lower-paying job doing something you love. In these situations, you may want some clarity on where to cut or where to increase your spending. 

Since the 50/30/20 rule gives you set ratios to work with, you can make sure you don’t overspend when your take-home pay increases. And if you take a pay cut for whatever reason, you can learn how to adjust your wants and needs without sacrificing your savings goals. 

When to Avoid the 50/30/20 Budget

While a lot of people can benefit from the 50/30/20 plan, it may not work for everyone. For instance, if you’re inundated with credit card debt, you might want to really cut back on your wants and utilize more than 20% of your income for paying down that debt.

On the flip side, if you earn a lot of money, you may be tempted to spend more than you normally would in the wants category when you could be building your wealth in more lasting ways. Also, if you live in an expensive real estate market, you may be forced to spend more than 50% on needs if your housing is exponentially high. Whether you rent or buy, you may end up using a major portion of your budget that skews the rest of your percentages. 

If any of these situations apply to you, then the 50/30/20 may not be the best option to organize your finances. 

The Bottom Line

Finding an effective way to take control of your money is never a bad thing. If you’ve struggled with creating a budget that actually sticks, try the 50/30/20 plan. You don’t have to download an app, pay a monthly fee, or meet with any kind of financial planner. 

To get started, you simply need to grab a month’s worth of paystubs and a calculator (or your phone) and figure out how much to allot for each category. You literally have nothing to lose by giving 50/30/20 a shot. If nothing else, it’s a good checkpoint to see how much you’re currently spending and whether or not you’re happy with those numbers.