Have you ever wondered if you’re spending your hard-earned money in the right place? Well, there’s a budgeting rule of thumb that can help you answer that question.
The 50/30/20 budgeting tool was first popularized by Senator Elizabeth Warren and her daughter, Amelia Warren Tyagi, in their 2005 book All Your Worth. More recently, the founder of LearnVest, Alexa von Tobel, sparked renewed interest in the rule after she endorsed its effectiveness.
With this strategy, you aim to spend 50% of your income on needs, 30% of your income on wants, and 20% goes toward savings and debt repayment. We talked to a financial expert to find out how the 50/30/20 rule works, and how to put your own spin on it.
What is the 50/30/20 budget rule?
In a nutshell, the 50/30/20 rule breaks down how to allocate your after-tax income to various budget categories. Say you earn $4,000 each month after taxes. Under the 50/30/20 rule, you would put $2,000 toward your needs (50%), $1,200 toward your wants (30%), and $800 toward saving and debt repayment (20%).
Here’s a breakdown of what each budget category means:
- Needs (50%): Bills you pay to keep a roof over your head, food in your fridge, and gas in your car. Basically, this is a catch-all term for necessities you spend money on each month.
- Wants (30%): Expenses that enrich your life but are not absolutely necessary. This category may include expenses like premium cable channels, a gym membership, or a meal kit food delivery service.
- Saving and debt repayment (20%): Money you put toward crushing your debt, and saving for short- and long-term goals.
Who does the 50/30/20 rule typically work for?
This strategy is best for those who have a pretty straightforward financial situation—like young adults and people with limited debt—according to Angela Moore, certified financial planner and founder of Modern Money Advisor.
In more challenging or complex scenarios, the percentage breakdown may not be realistic. “[This rule] doesn’t necessarily work for a lot of Americans… Everyone’s situation is so different, and some people don’t have the luxury to spend 30% of their income on wants. And 20% is not [always] enough for saving—especially not debt and saving,” Moore says.
The average millennial, for example, is spending 45% of their income on rent during their first decade in the workforce. Or, you might be earning just enough to make ends meet after a job loss, and devoting 30% of your income to luxuries may not be possible. Instead, you may need to allocate most (or even all) of your income to essentials like rent and utilities until you get back on your feet.
Furthermore, reserving such a small portion of your income to savings and debt combined could make it difficult to meet long-term financial goals. According to a Northwestern Mutual study, Americans over 18 carry an average of $29,800 in personal debt (not including a mortgage) and 22% of Americans have less than $5,000 in retirement savings. People approaching middle-age or preparing for retirement might need to allocate significantly more to savings and debt repayment to live comfortably in the golden years.
You can fudge the numbers
The 50/30/20 budget strategy isn’t a hard-and-fast rule, and you can change the percentages to fit your financial situation. Moore recommends working backward to figure out what works for you.
First, set financial goals that have a deadline and then see if using the 50/30/20 method will help you meet those benchmarks within your time frame.
If not, you can adjust the percentages in a way that will help you get to where you want to be.
For example, say you earn $4,000 per month, you have no debt, and you want to save $7,000 for a down payment within six months. Saving 20% (or $800) of your income each month for six months isn’t going to work.
To meet your $7,000 goal, you could find ways to reduce your “needs” and “wants” spending. Perhaps you could downsize to a smaller apartment or move in with family to temporarily reduce your living expenses. You could also cut out non-essential items like streaming services or boozy brunch dates.
After reducing these expenses, rework the percentages. Lowering “needs” spending to 45% of income ($1,800) and “wants” spending to 20% of income ($800) could give you the room to increase the savings budget to 35% of income, or $1,400 per month.
After six months of following your very own 45/20/35 rule, you would have $8,400 saved for the down payment with some cash to spare.
As your priorities change, you can always adjust your budget percentages to add entertainment back into the mix. After all, what’s life without a little bit of fun?
Here’s how to get started
If you want to implement the 50/30/20 budget rule (or another percentage allocation), here are some steps to get started:
- Write down your income: Jot down how much money you earn each month after taxes. Be sure to include income you make from full-time work and side jobs.
- Calculate the percentages: Use the 50/30/20 rule to calculate what to spend in each area given your income; of course, this can be used as a starting point.
- List your expenses, debt payments, and savings goals: Write down and add up your actual expenses (essential and non-essential) along with savings and debt payments to see what percentage of your income you’re currently spending in the different categories. From there, make budget cuts and adjust the percentage breakdown to arrive at an allocation that works for you.
- Set up several bank accounts: Create different places to store money for each budget category. For example, open an account for non-essential spending, essential bills, and savings. Moore suggests separating accounts this way because you’ll be able to freely spend money from your “wants” account knowing bill money is safe in a separate place.
- Schedule payments: Set up an automatic transfer of your income to the various accounts when you get paid. You may be able to set up multiple direct deposits with your employer. If not, try setting up biweekly or semi-monthly transfers from account to account with your bank. Automation takes the emotional element out of budgeting, Moore says. When you’re having a bad day, you’ll hopefully be less inclined to dip into your savings for some retail therapy if the money isn’t sitting in your everyday checking account.
In a perfect world, you would set up a budget and stick to it religiously—but things happen. If you’re unable to stay on the budgeting bandwagon, don’t be too hard on yourself. You can always hop back on when you’re financially able. The 50/30/20 may not be one-size-fits-all, but using some variation of it could help you on your journey to meeting your financial goals.