What Is the 50/30/20 Rule in Finance?

The 50/30/20 rule in finance is a budgeting framework that divides your net income into three categories: 50% for needs, 30% for wants, and 20% for savings and debt repayment. This framework helps cover your needs, manage debt, and occasionally indulge while saving for unexpected expenses and retirement.

Examples of the expenses in each category include:

Needs (50%)

Half your income should cover the required expenses you cannot avoid:

• Housing

• Food

• Utilities

• Transportation

• Insurance

• Minimum loan payments

• Child care

Wants (30%)

A third of your income should cover extras that are nonessential to living and working:

• Monthly subscriptions

• Entertainment

• Dining out

• Shopping for designer clothes and home items

• Gym memberships

• Travel

Savings (20%)

A fifth of your income should be used for paying down debt and creating a financial cushion:

• Building an emergency fund

• Saving for retirement

• Paying off debt

50/30/20 Rule Modifications

You can modify the percentages in the 50/30/20 rule according to your circumstances. For instance, if your goal is to save money or pay down debt, you could reduce the percentage spent on wants and increase the percentage toward savings and debt.

Benefits of the 50/30/20 Rule

Following the 50/30/20 rule provides many benefits:

• Ease of use: The straightforward framework is easy to understand and apply. You can immediately follow the guidelines with easy calculations.

• Better money management: Creating a spending plan helps cover your necessary expenses, leaving discretionary spending and saving for the future.

• Prioritization of necessary expenses: You can cover your fundamental needs without taking on too much debt or going over budget.

• Emphasis on savings: Establishing sound financial practices and building a safety net support a sustainable lifestyle and future goals.

• Long-term financial security: Regular saving helps you take on less debt and reach your financial goals.

Tips for Implementing the 50/30/20 Rule  

Consider using these tips to help you implement the 50/30/20 rule:

• Downsize your home and/or vehicle if you are spending more than half your income on needs.

• Reduce your wants to increase the money going toward needs, debt repayment, or savings.

• Carpool to work.

• Cook at home rather than dining out.

• Use free apps to watch television and movies.

• Work out at home rather than at the gym.

• Watch sports on television rather than at the stadium.

• Make debt repayments beyond the minimum.

• Set up automatic deposits.

• Use automatic payment systems.

• Monitor your income changes to determine which category the additional money should go in.

*This information is for educational purposes only.