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What Is the 50/20/30 Budget Rule? How It Works
Learn about Elizabeth Warren's 50/20/30 budget rule; a simple and effective plan for personal money management and wealth creation.
Senator Elizabeth Warren popularized the so-called "50/20/30 budget rule" (sometimes labeled "50-30-20") in her book, All Your Worth: The Ultimate Lifetime Money Plan. The basic rule is to divide up after-tax income and allocate it to spend: 50% on needs, 30% on wants, and socking away 20% to savings.1 Here, we briefly profile this easy-to-follow budgeting plan.
Needs are those bills that you absolutely must pay and are the things necessary for survival. These include rent or mortgage payments, car payments, groceries, insurance, health care, minimum debt payment, and utilities. These are your "must-haves." The "needs" category does not include items that are extras, such as HBO, Netflix, Starbucks, and dining out.
Half of your after-tax income should be all that you need to cover your needs and obligations. If you are spending more than that on your needs, you will have to either cut down on wants or try to downsize your lifestyle, perhaps to a smaller home or more modest car. Maybe carpooling or taking public transportation to work is a solution, or cooking at home more often.
Wants are all the things you spend money on that are not absolutely essential. This includes dinner and movies out, that new handbag, tickets to sporting events, vacations, the latest electronic gadget, and ultra-high-speed Internet. Anything in the "wants" bucket is optional if you boil it down. You can work out at home instead of going to the gym, cook instead of eating out, or watch sports on TV instead of getting tickets to the game.
This category also includes those upgrade decisions you make, such as choosing a costlier steak instead of a less expensive hamburger, buying a Mercedes instead of a more economical Honda, or choosing between watching television using an antenna for free or spending money to watch cable TV. Basically, wants are all those little extras you spend money on that make life more enjoyable and entertaining.
Finally, try to allocate 20% of your net income to savings and investments. This includes adding money to an emergency fund in a bank savings account, making IRA contributions to a mutual fund account, and investing in the stock market. You should have at least three months of emergency savings on hand in case you lose your job or an unforeseen event occurs. After that, focus on retirement and meeting other financial goals down the road.
If emergency funds are ever used, the first allocation of additional income should be to replenish the emergency fund account.
Savings can also include debt repayment. While minimum payments are part of the "needs" category, any extra payments reduce the principal and future interest owed, so they are savings.
Importance of Savings
Americans are notoriously bad at saving, and the nation has extremely high levels of debt. As of March 2020, Americans have $14.3 trillion in total debt, which includes $438 billion in credit card debt. The personal savings rate in 2019 was 7.6%, down from 11% in 1960.
The 50-20-30 rule is intended to help individuals manage their after-tax income, primarily to have funds on hand for emergencies and savings for retirement. Every household should prioritize creating an emergency fund in case of job losses, unexpected medical expenses, or any other unforeseen monetary cost. If an emergency fund is used, then a household should focus on replenishing it.
Saving for retirement is also a critical step as individuals are living longer. Calculating how much you will need for retirement and working towards that goal, beginning at a young age will ensure a comfortable retirement.
The Bottom Line
Saving is difficult, and life often throws unexpected expenses at us. By following the 50-20-30 rule, individuals have a plan with how they should manage their after-tax income. If they find that their expenditures on wants are more than 20%, they can find ways to reduce those expenses that will help direct funds to more important areas such as emergency money and retirement.
Life should be enjoyed, and it is not recommended to live like a Spartan, but having a plan and sticking to it will allow you to cover your expenses, save for retirement, all at the same time doing the activities that make you happy.
The 50/30/20 Rule of Thumb for Budgeting
The 50/30/20 rule is an easy way to allocate your money among wants, needs, and savings. Learn how it works, where it comes from, and how to apply it to your finances.
Lindsay VanSomeren is a credit card, banking, and credit expert whose articles provide readers with in-depth research and actionable takeaways that can help consumers make sound decisions about financial products. Her work has appeared on prominent financial sites such as Forbes Advisor and Northwestern Mutual.
Marguerita is a Certified Financial Planner (CFP®), Chartered Retirement Planning Counselor (CRPC®), Retirement Income Certified Professional (RICP®), and a Chartered Socially Responsible Investing Counselor (CSRIC). She has been working in the financial planning industry for over 20 years and spends her days helping her clients gain clarity, confidence, and control over their financial lives.
The 50/30/20 rule of thumb is a way to allocate your budget according to three categories: needs, wants, and financial goals. It’s not a hard-and-fast rule but rather a rough guideline to help you build a financially sound budget.
To better understand how to apply the rule, we’ll look at its background, how it works, and its limitations, plus go through an example. In other words, we’ll show you how and why to set up a budget using the 50/30/20 rule of thumb yourself.
What Is the 50/30/20 Rule of Thumb?
The 50/30/20 rule of thumb is a set of easy guidelines for how to plan your budget. Using them, you allocate your after-tax income to the following categories.
50% to Needs
Needs are what you can’t live without, or at least very easily. They include things like:
30% to Wants
Wants are what you desire but don’t actually need to survive. They might include:
Image by © The Balance 2019
20% to Financial Goals
This category covers two main areas:
Because this is just a guideline for planning your budget, you’ll need to supplement it with something to monitor spending, such as a budget tracker like YNAB (You Need a Budget), Mint, or Quicken. You can then set the 50/30/20 percentages as targets within whichever budget tracker you prefer.
Where Does the 50/30/20 Rule of Thumb Come From?
The 50/30/20 rule was popularized by Sen. Elizabeth Warren (a Harvard law professor when she coined the term) and her daughter, Amelia Warren Tyagi, in the book All Your Worth: The Ultimate Lifetime Money Plan.1 It was designed as a rough rule of thumb for working-class families to plan their spending in order to prepare for the future and unforeseen circumstances.
How To Use the 50/30/20 Rule of Thumb for Budgeting
Most people save too little, and unknowingly spend too much. The 50/30/20 rule of thumb is a way to become aware of your financial habits and limit overspending and under-saving. By spending less on the things that don’t matter that much to you, you can save more for the things that do.
Here’s how it works:
An Example of the 50/30/20 Rule of Thumb
Here’s an example using the steps above:
Why the 50/30/20 Rule of Thumb Generally Works
Figuring out your finances is confusing and it’s often hard to know where to start. That’s one reason the 50/30/20 rule of thumb works so well: It’s an easy way to get a handle on something that can otherwise be intimidating.
Even if you don’t take it any further by tracking how well you stick to these targets, it’s still a good way to take your financial pulse.
Grain of Salt
Like any rule of thumb, it’s a good idea to take the 50/30/20 rule of thumb with a grain of salt. Here’s why:
Potential for Gray Areas
It’s sometimes hard to sort out your spending according to three categories. Everyone needs to eat, for example, but some groceries fall into the wants category (like sugary sodas and unhealthy snacks).
Can Be Difficult for Low-Income People
If you’re earning just enough to make ends meet, you may struggle to save 20% of your income regardless of how you live, especially if you’re supporting a family.
Savings Might Not Be Enough
On the flipside, if you have big goals like retiring early or buying a house in a high-income area, 20% might not be enough.
For example, you’d need $360,000 to afford a 20% down payment on a median-priced home in San Francisco—almost the entire cost of an average-priced home nationwide.23
You Still Need to Track Your Budget
The 50/30/20 budget rule is only one piece of the budgeting puzzle. It’s good to shoot for these percentages, but unless you track your spending, you’ll never know if you’re actually hitting them.
50/30/20 Rule of Thumb vs. Other Budgeting Methods
The 50/30/20 rule of thumb isn’t the only game in town. Here are a few other budgeting techniques that might work better for you:
Frequently Asked Questions (FAQs)
How does tithing figure into the 50/30/20 rule?
As with any rule of thumb, you'll need to adjust it to fit your specific circumstance. When it comes to tithing or any other religious expense, individuals can decide for themselves whether that's something they "want" or "need."
Where does credit card debt go in the 50/30/20 rule?
Paying down debt is considered a financial goal. That means you should allocate 20% of your budget toward some combination of paying down debt and saving for the future.
How much of your paycheck should you spend with the 50/30/20 rule?
The 50/30/20 rule doesn't specify how much of each paycheck you should spend. The percentage of your paycheck that you spend or save largely depends on the 20% financial goal category. If your main financial goal is to reduce debt, you'll be spending more of your paycheck on that. If your main financial goal is to save up an emergency fund, then you'll be saving more of your paycheck.
Why Is The 50 20 30 Rule Easy To Follow Especially Those Who Are New To Budgeting And Saving?
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