4 Reasons 50/30/20 Budgeting Rule Really Works (And 4 Ways It's Risky)

It can be difficult to create and stick to a budget, but it’s often a preferred method for helping build your savings. According to the most recent Survey of Consumer Finances from the U.S. Federal Reserve, the average savings for U.S. families was $62,410.

Whether your savings fall below or above this average, it’s important to find ways to stay motivated in your budgeting efforts. 

The 50/30/20 rule is a simple budgeting technique that’s easy to implement. Let’s see how it works and whether it might make sense for you.

The 50/30/20 rule is a set of guidelines that could help with a budgeting plan. It’s called a “rule,” but it’s not something every person who’s budgeting needs to follow.

For example, if you find it difficult to start and stick to a budget, following the 50/30/20 rule could be helpful. It offers a straightforward approach to budgeting that some find easy to understand and implement. 

With this rule, you typically divide your after-tax monthly income into three categories with fixed percentages: 50% for necessary expenses (needs), 30% for discretionary expenses (wants), and 20% for savings and debt payments.

This budgeting strategy is believed to originate from the book, “All Your Worth: The Ultimate Lifetime Money Plan,” written by U.S. Senator Elizabeth Warren and her daughter, Amelia Warren Tyagi.

Keep in mind that this isn’t the only budgeting strategy out there, but it’s one of many that could help simplify the process and keep you motivated to stay on track with your personal finance goals.

Before starting any budgeting plan, it’s important to take inventory of your financial situation, including your total income and expenses.

With the 50/30/20 rule, you’re separating your after-tax income into three budgeting categories on a monthly basis. After-tax income is often referred to as your “take-home pay,” or the money you receive after taxes and other expenses are deducted from your paycheck.

Once you know your monthly after-tax income, it’s time to divide it into your needs, wants, and savings.

Fifty percent of your monthly income will be diverted to your needs, or necessary living expenses. These are all your monthly expenses that have to be paid, which could include:

• Rent or mortgage payments
• Utilities, including electricity, gas, and internet
• Vehicle costs
• Health insurance and car insurance
• Health care
• Groceries
• Minimum payments on debt

Following the 50/30/20 guidelines, you shouldn’t be spending more than 50% of your income on your needs. So if you make $5,000 per month, no more than $2,500 should go toward necessary expenses.

Thirty percent of your monthly income goes toward your wants, or discretionary expenses. These aren’t expenses that are necessary for everyday living, but they could still be helpful for improving your quality of life. These types of expenses could include:

• Going to a movie or concert
• Covering a gym membership
• Buying nonessential groceries
• Purchasing gifts
• Paying for subscriptions such as Netflix or Amazon Prime
• Eating at restaurants
• Shopping for clothes

You could likely live without any of these expenses, but they’re often still important. However, you wouldn’t want to spend over 30% of your income on your wants with the 50/30/20 rule. With a $5,000 monthly income, 30% would be $1,500.

Your last category is savings and debt repayments, which accounts for the final 20% of your budget. This is where you could start putting money away for savings or put additional money toward paying down debt.

Keep in mind that minimum debt payments are typically considered part of your necessary expenses and would fall within the 50% category. 

This category is where you could use additional funds to make extra payments toward paying off debt. Here are some examples of where you might use the remaining 20% of your monthly income:

• Retirement accounts, including a 401(k) or IRA
• Emergency fund or rainy day fund
• Savings account for a specific goal, such as a down payment on a house
• Paying down credit card debt
• Paying down personal loan debt
• Getting rid of student loan debt
• Making extra mortgage payments

Even though this category gets the lowest percentage of your income, it shouldn’t be written off as insignificant. On a $5,000 monthly income, 20% would be $1,000. Over the course of a year, that’s $12,000 that could go toward savings and debt payments.

If you’re learning how to manage your money, the 50/30/20 budgeting rule could be right for you. But it might not be an ideal fit for every situation.

Because this budgeting method requires you to know your after-tax monthly income, it’s likely a good fit if you receive consistent, predictable paychecks. This would typically mean knowing exactly how much money you’ll have at your disposal each month. And this number could be easily adjusted if you get a raise or promotion or change jobs.

But in the case of many independent contractors or freelancers, your monthly income could frequently change. The workload you receive from different clients could vary on a weekly basis, which would likely affect your monthly income amount. You could still use the 50/30/20 method, but it could require constant adjustments.

The point of this type of budgeting strategy is to help you feel confident in sticking to a budget and ultimately improving your financial situation. If there are too many details to handle, you could lose motivation.

A 50/30/20 budget offers plenty of benefits for those new to budgeting. Here are a four reasons it might be right for you.

There’s nothing complex about the 50/30/20 rule, which could be helpful if you’re new to budgeting and want a financial plan that’s easy to understand.

Although it’s a simple plan, this budgeting strategy could be more motivating than trying to budget on your own. Having some structure and being able to quickly see results after a month might be enough motivation to continue budgeting.

If you don’t know how much money is coming in and where your money goes, this type of budgeting plan might help. After calculating your income and expenses, you should have a better idea of how to manage your money.

The main purpose of most budgeting plans is to pay down debt or save money. With this method, you have 20% of your income to put toward either goal or both.

A 50/30/20 budget won’t always be the best option for every situation, Here are four reasons why it might not be the best budgeting option for you.

Everyone’s situation is different, which means the 50/30/20 won’t always work. For example, if a lower-income household has to spend more than 50% of their monthly income on necessities, they won’t be able to stick with this strategy.

What if you want to put more money toward savings or you’d rather lower how much you spend on your wants? If you want to follow this method exactly, you have to stick to the recommended percentages.

The line between wants and needs might not always be as distinct as we’d like. It’s up to you to decide what’s a necessary expense.

Should you be putting more money toward savings or debt payments in the 20% category? The strategy itself doesn’t give a recommendation one way or the other, which might be confusing.

If the 50/30/20 rule doesn’t resonate with you, don’t be afraid to experiment with different budgeting methods. The key is to find a system that works for you and helps you achieve your financial goals.

Here are some other options to consider.

This is when your income minus your expenses equals zero. For a monthly budget, this means assigning all your income to different expenses each month, starting with your necessary expenses. This includes groceries, rent, car payments, utilities, and more. 

Then you move on to assigning income toward financial goals, including savings goals, and then on to expenses for things you want but don’t need. 

You stop assigning income when you hit zero and you adjust your budget if certain expenses fluctuate.

You divide your income into different spending categories. If you use all the money in an envelope, you don’t spend anything else in that category for the month. 

If you have money leftover in an envelope at the end of the month, you would typically roll it over to the next month or put it toward one of your financial goals.

Certain budgeting apps could take a lot of the hard work out of creating and sticking to budgets. They also might find areas in your budget where you could cut spending that you might not have considered. 

For example, Rocket Money offers a service to help you find and remove unwanted subscriptions. If you want help with overspending and monitoring your credit score, an app such as Mint could come in handy.

What’s the difference between the 50/30/20 rule and the 70/20/10 rule?

The 50/30/20 rule separates your after-tax income with 50% going toward needs, 30% going toward wants, and 20% going toward savings and debt payments. 

The 70/20/10 rule also separates after-tax income into three categories, but with a different approach. Seventy percent goes to needs and wants, 20% goes to savings, and 10% goes to debt payments or donations.

Is the 50/30/20 rule weekly or monthly?

You can adjust the guidelines of the 50/30/20 to be weekly or monthly, but some find it easier to budget on a monthly basis. For example, you would calculate your after-tax income on a monthly basis and put 50% toward necessary expenses, 30% toward discretionary expenses, and 20% toward savings and debt payments.

What’s the best way to save for retirement?

The best way to save for retirement depends on your situation and what money management strategies you feel most comfortable with. Here are some common retirement savings tips:

• Start saving early
• If you can’t save early, start as soon as you can
• Take advantage of retirement accounts, including a 401(k) or IRA
• Set savings goals
• Use budgeting techniques to cut spending and help pad your savings
• Learn about different types of investments
• Automate your savings

The 50/30/20 rule could provide helpful guidelines for starting and sticking to a monthly budget. But keep in mind that following this rule will not work in every situation, and adjustments can always be made if needed. 

In some cases, it could make sense to supplement your budget guidelines with additional resources.

Certain apps could give you the extra boost you need to stick with your budget by helping you automate your savings, cut your bills, or track your spending. For some of the top budgeting resource options, check out our list of the best budgeting apps.