What is the 50/30/20 Rule?
The 50/30/20 rule is a simple budgeting method that divides your after-tax income into three categories. It was popularized by Senator Elizabeth Warren in her book "All Your Worth" and has become one of the most widely used budgeting frameworks because of its simplicity.
The Three Categories
Needs
Essential expenses you must pay
- Rent or mortgage
- Utilities
- Groceries
- Health insurance
- Car payment/transportation
- Minimum debt payments
Wants
Things you enjoy but don't need
- Dining out
- Entertainment
- Subscriptions
- Shopping
- Hobbies
- Vacations
Savings & Debt
Building wealth and paying down debt
- Emergency fund
- Retirement contributions
- Extra debt payments
- Investments
- Savings goals
Example Budget
Monthly Income: $4,000 (after tax)
How to Apply the Rule
- Calculate your after-tax income
This is your take-home pay after taxes and deductions.
- List all your expenses
Track everything you spend for a month.
- Categorize each expense
Is it a need, want, or savings/debt payment?
- Calculate your current percentages
How does your actual spending compare to 50/30/20?
- Adjust as needed
Cut wants or find ways to reduce needs to hit targets.
When to Adjust the Ratios
The 50/30/20 rule is a guideline, not a strict law. You may need to adjust based on your situation:
- High cost of living: Needs might be 60%, with wants at 20%
- Aggressive debt payoff: Try 50/20/30 (more to debt)
- High income: Consider 50/20/30 (more to savings)
- Starting out: 70/20/10 while building income
Common Questions
Is the gym a need or want?
Usually a want. Unless it's required for your job or prescribed by a doctor, it's discretionary.
What about debt payments?
Minimum payments are needs. Extra payments beyond the minimum count toward the 20% savings/debt category.
Where do subscriptions go?
Most are wants (Netflix, Spotify). Some might be needs if required for work.
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