The 50 30 20 Budget Rule Explained [Ultimate Guide]

50 30 20 budget explained

In this day and age, a growing number of individuals are living paycheck to paycheck. While the reasons for doing so may vary, this struggle to manage income can take its toll on any household. Fortunately, the personal finance solution known as the 50 30 20 Budget can help keep your resources on track.

The following comprehensive guide to the 50 30 20 Budget can help you start off the decade with financial empowerment.

What Is A 50 30 20 Budget?

A 50 30 20 budget refers to a formula for dividing up your after-tax income to help reach financial goals. Popularized in Senator Elizabeth Warren’s book, All Your Worth: The Ultimate Lifetime Money Plan, the 50/30/20 rule provides a mathematical formula for dividing your earnings among needs, wants, and savings.

50 30 20 budget rule infographic

The Three Categories In A 503020 Budget

The three categories included in a 50/30/20 budget are: needs, wants, and savings.

50 Percent: Needs

Needs are bills that you are contractually obligated to pay or that are necessary for basic human survival. These living expenses include rent or mortgage payments, health care, groceries, and utilities.

This category can also include the “minimum monthly payment” on any debt you have undertaken. While this budget category includes food and utilities, it excludes non-essential lifestyle choices (e.g. ordering Starbucks or television-subscription services like Hulu and Netflix).

The idea is that half of your after-tax income should be able to cover your priorities, obligations, and essential living needs. If you are having trouble meeting your needs, you may need to evaluate downsizing your lifestyle or cutting back on wants until all of your needs are met.

30 Percent: Wants

The “wants” category refers to the non-essential items on your budget. These may include expenses like dining out, vacations, recreational activities, and clothing accessories.

Wants also include upgrades and costlier alternatives to essential needs (e.g. expensive steak instead of sale-priced ground beef; high-speed internet instead of standard).

20 Percent: Savings

Savings refer to allocations toward a bank savings account, retirement funds, and any investment payments. This means that 20-percent of your income should go into creating an emergency fund, making IRA contributions, and investing in the stock market.

Ideally, you should have enough cash in savings to cover at least three months of essential needs. This savings protects you in the event you lose your job or a sudden disaster happens in your life.

Once you have the minimum emergency fund set aside, you can allocate the remainder toward investment and retirement savings.

This section also refers to any additional debt repayment. While making the minimum required payment is a “need,” additional payments can lower the amount of principal and future interest owed. This results in savings.

The 50/30/20 Rule Gross or Net? (Before or After Taxes?)

The 50/30/20 budget rule refers to after-tax income (Net take-home pay). It is a strategy for how to budget your net income after paying any taxes owed.

According to Elizabeth Warren and her daughter and co-author, Amelia Warren Tyagi, budgeting your net income is a simple way to ensure that you meet personal finance goals.

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If you are an employee, net income is the number after your employee has deducted income taxes and other legal requirements like social security. Payroll deductions for health insurance and 401(k) contributions have also been added back in (which is why you need a budgeting method for allocating them yourself).

Simply review your pay stubs to get an accurate figure on your after-tax income.

If you are self-employed, you will need to pay the applicable income tax for your bracket before determining your net income. This means that your after-tax income equals your gross income MINUS your business expenses (such as the cost of your laptop) along with the money you already set aside for taxes.

How To Set Up A 50/30/20 Budget

how to set up a 50/30/20 budget

The 50 30 20 budget is a way to manage your disposable and discretionary income after taxes.

  • Disposable income is total personal income minus taxes. You need this income to cover your basic living needs.
  • Discretionary income is disposable income minus all payments that are necessary to meet current bills. This means that once you have paid required bills, you must divide the remainder of after-tax income between wants and savings.

Step One:

Now that you have measured out your after-tax income, it is time to set up your 50 30 20 budget. The first rule of thumb is that half of your after-tax income (50-percent) should cover your non-negotiable needs. This half of your after-tax income is also known as disposable income.

Using your disposable income for needs only allows you to maintain your quality of life while leaving enough discretionary income for flexible wants and savings. Use a spreadsheet to outline all of your non-negotiable needs.

Wants Vs. Needs

How do you know something is a “need”? The rule of thumb is that if “going without” an item will critically impact your quality of life, then it is a need.

Examples of these fixed expenses include rent or mortgage payments (also known as “shelter” or housing), groceries (basic sustenance or food), essential utilities (electricity or water, etc.), health coverage (including required prescriptions), and compulsory insurance (such as car insurance).

Needs also include the minimum payment required on a debt. These may include credit card payments or the minimum monthly payment on student loan debt.

The reason this monthly payment is a “need” is that non-payment can negatively impact your credit score or end up with garnishments on your wages. Since credit score affects your quality of life, making the minimum monthly payments can keep your bills current and prevent your accounts from going into default.

Step Two:

Now that you have paid your bills and minimum debt repayments, you can designate 30-percent of your remaining after-tax income to “wants.”

For some people, the concept of “wants” immediately evokes images of trips to Maui, designer handbags, and expensive dining. When it comes to budgeting, however, “wants” do not refer to extravagances.

Instead, the wants category indicates the niceties or upgrades you might enjoy (but that are not necessarily essential to survival). These may include home cable or unlimited texting on your cell phone plan.

To calculate your wants, use a spreadsheet to list niceties and upgrades you would like to make within your everyday lifestyle. Your wants should take up no more than 30-percent of your after-tax income.

Using a spreadsheet can help you evaluate spending habits and better manage your money. If you find that your wants tend to exceed the 30-percent mark, be prepared to make adjustments (such as eating out less frequently) until you fall within your budget range.

Step Three:

The final step is to devote 20-percent of your income to savings and additional debt repayment. Savings refer to your emergency refund, retirement account, and extra payments on any outstanding debt.

For example, if you carry a credit card balance or car loan, the minimum payment is a need that you should budget into the greater 50-percent of your budget. You should calculate any additional payments into the savings portion of your budget.

Example of a 50/30/20 Budget

Suppose your monthly income after taxes is $3750. This means that you should allocate $1875 (50%) to your needs. In practice, this means that if you monthly rent is $1000, the remaining $875 has to cover health insurance, car insurance, groceries, utilities, and payments on your credit card and student loan.

Budgeting Needs:

If you have trouble meeting your needs in this 50-percent range, consider downsizing or making some adjustments. For example, you may wish to relocate after your lease expires to make your budget more manageable.

Other ways to make adjustments include shopping for cheaper insurance or transferring the balance from your first credit card to one with a lower interest rate (thereby reducing the minimum payment required).

Budgeting Wants:

Using the same example, this budget allows $1125 (30%) to cover any wants. This monthly allowance allows you to enjoy a decent quality of life while maintaining financial health. For this category, you can also shop sales on “want” items to enable even greater maneuvering room in your budget.

Budgeting Savings:

Finally, the remaining $750 of your monthly income should go into savings. Distribute it within your emergency fund, retirement account, and any extra debt payments.

This zero-based budgeting method that allows you to allocate every penny of your monthly income into expenses, savings, and debt repayment.

By managing your expenditures in terms of appropriations (devoting the sum of your money to a specific purpose), you can reduce the amount of stress associated with paying your bills and help secure your financial future.

How To Calculate 20% Of Your Income

To secure your financial goals under a lifetime money plan, you will need to dedicate at least 20-percent of your income to savings. But how do you calculate 20-percent of your income?

In math, the number 100 represents a whole. Whatever percent you want to calculate is simply part of that whole. So if 20 percent is that number, divide 20 by 100 to get the decimal format of 0.20. (This decimal 0.20 means exactly the same as 20%. We just changed it to a decimal to make the math easier.)

Once you have changed your percent to a decimal, you can then multiply it by your monthly income to know the exact amount you need to save each month. In our example, the after-tax monthly income is $3750. To determine 20-percent of a monthly income of $3750, multiply $3750 by 0.20 to get $750.

($3750 x 0.20) = $750
($3750 x 0.30) = $1125
($3750 x 0.50) = $1875

50 30 20 Budget Calculator

If math isn’t your strong suit, you’re in luck! I have designed a free 50/30/20 budget calculatog>r just for you.

Enter your net income in the box below to give yourself the amount that should be delegated to each area.

cropped 836 Arrest Your Debt JK 01 1 The 50 30 20 Budget Rule Explained [Ultimate Guide]

50/30/20 Budget Calculator

A simple guide to manage your money with the 50/30/20 rule

Enter your monthly take-home pay

Your Budget For:

Necessities : $0.00
Wants : $0.00
Savings and paying off debt : $0.00

A Good Rule Of Thumb For How Much You Should Save

rule of thumb for how much you should save

According to the 50/30/20 budget rule, you should delegate 20% of after-tax income to savings. But since savings include several subcategories, how should you manage this amount?

The savings category includes the following subcategories:

  • Retirement Savings
  • Emergency Fund
  • Bank Savings Account
  • Extra Debt Repayment (such as a debt avalanche plan)

Retirement Savings

As a rule of thumb, most experts agree that you should designate about half of your savings category (or 10% of your after-tax income) to the retirement subcategory.

This includes employee retirement contributions and any matching or profit-sharing contributions from an employer. Invest consistently into a mutual fund or save in tax-advantaged retirement savings accounts such as a 457(b), 401(k), 403(b), or IRA.

Emergency Savings

Similarly, you should devote about a fourth of your savings category (or 5% of your after-tax income) to the emergency fund subcategory.

An emergency fund is a form of short-term savings to cover unforeseen expenses. This fund is NOT a long-term savings account to pay for things college tuition, cars, or vacations.

Rather, it is a safety net to cover financial crises such as major illness or job loss.

As a rule of thumb, you should keep putting savings into your emergency fund until you have enough money to cover at least three to six months’ worth of expenses. Once you reach the six-month threshold, you can continue to save on a discretionary basis or redirect these funds into other savings subcategories.

For example, some people decide to save even more for retirement after ensuring that they have six months’ worth of income stored away for personal emergencies.

Debt Repayment

Experts believe that you should devote the last one-fourth of your savings category (or 5% of your after-tax income) to debt repayment. This includes student loan and credit card payments that go above and beyond the minimum payment required each month.

Debt repayment may also include any accelerated repayment plans such as the debt avalanche method. This means that after you make allocations for the minimum payment required for any debt owed, you direct any remaining repayment funds to the debt with the highest interest rate.

Paying off high-interest rates means that less interest can accumulate on your bill. This can reduce the total amount of time it takes to get out of debt.

The Savings Rule

The savings rule is a conventional rule of thumb published in The Richest Man in Babylon in 1926. As the brainchild of author and businessman George Samuel Clason, this rule dictates that a person should devote at least 10% of income to savings.

While this target may have been ideal in the 1920s, fewer pension plans and longer life expectancy means that 10% these days usually needs to go into retirement alone.

Following the 50 30 20 rule automatically gives you a 20% personal savings rate.

This 20% total personal savings rate means that you can designate 10% to retirement — and still have 5% for an emergency fund and another 5% for any debt repayment plan.

Does The 50 30 20 Rule Include My 401k?

does the 50 30 20 rule include my 401(k)

The 50/30/20 rule includes the 401k under the “savings” budget category. According to the rule, you should devote 20% of your income to savings (including retirement savings).

A 401k is a retirement savings account that lets an employee divert part of a salary into long-term investments. An employer may also match the employee’s contribution up to a designated limit.

Under the 50/30/20 rule, for example, you might devote half of your monthly savings (or 10% of your after-tax income) into a retirement account. You can then put the rest of your monthly savings into an emergency fund or debt repayment plan.

Is Saving 20 Percent Of My Income Enough?

Saving 20 percent of your income is enough to follow the 50/30/20 rule. For example, if you save into an investment account with an average return of 5 percent each year, you should have a decent amount to support yourself if retiring by age 65.

It is even better if your employer also matches this contribution.

However, some individuals feel more confident in guaranteeing that they can do more than “get by” in their golden years. If you are a high earner, it is wise to keep your expenses as low as possible and save plenty of money when you are young.

Saving early gives your money enough time to accumulate compound interest and support yourself into old age.

If you are not necessarily a high earner, no need to panic. Prioritize contributing to a retirement account and securing enough money into your emergency fund.

Once you feel comfortable enough with your emergency fund and debt-to-income ratio, you can refocus on retirement savings. You may also wish to look into a side hustle or additional income stream to increase your total disposable income.

Is It Better To Save or Pay Off Debt?

The 50/30/20 rule dictates that 20% of your after-tax income should go into savings. But since the savings category includes the subcategories of retirement, emergency fund, and debt repayment, is it better to save or pay off debt?

The answer depends on several factors.

First, it is important to at least have a three-month emergency fund in case of sudden, unforeseen emergencies like sudden illness or job loss. In the case of job loss, knowing you are debt-free is great, but you would still have nothing to live on without an emergency fund.

It is important to have short-term savings covered before focusing on aggressive debt repayment.

Second, saving into an account versus paying off debt also depends on interest rate. If your debts are accumulating more interest than you are earning in interest with your savings accounts, then you are losing money.

For this reason, experts recommend paying off very high-interest credit cards (such as APR 28.99%) with part of the money in your savings category.

Finally, not all debt is “bad debt.” For example, if you have a credit card with a very low-interest rate, making consistent on-time payments can actually help you build a solid credit history. (You can check or monitor your credit score on Credit Karma or similar personal finance website.)

If you ever need to apply for credit, having “no credit” can present almost as much difficulty as having “bad credit.” Therefore, making minimum monthly payments, or better yet, paying off the card in full each month on a low-interest credit card (which falls within your “needs” category) can strengthen your credit score in the long run.

You can then use the 20% of your income to keep saving as usual.

Employee Savings Vs. Self-Employment Savings

If you have an employer that matches retirement savings, it absolutely makes sense to save into a retirement plan. Try to contribute enough to at least reach the maximum employer match threshold.

Not contributing is the equivalent of turning away free money in the name of “paying off debt first” and would not make sense financially.

If you are self-employed, it is imperative to have a solid emergency fund in the event of irregular income. Since no one can foresee the future, it is important to set money aside in case the cash flow starts to arrive in unequal increments.

Retirement savings for self-employed individuals may also include a Roth IRA, SEP IRA, or defined benefit plan.

Groceries: How Much Should You Spend On Food A Month?

how much you should spend on groceries

According to the Bureau of Labor Statistics (BLS), the average American household spends $7,700 each year on groceries and eating out. That roughly translates into 12.8% of your after-tax income (or a little over one-fifth of the money in your “needs” category).

For suburban and rural households, food is the third-highest expense after housing and transportation. Among urban dwellers, food is the second-highest expense (right after housing).

The United States Department of Agriculture (USDA) and the Food and Drug Administration (FDA) advise that budgeting just beneath the national average is a decent amount to spend on food. This means your overall food budget should be 10%-11% of your monthly budget (or exactly one-fifth of the money in your “needs” category).

For most households, this would translate into 6% of your monthly income on groceries and 4%-5% of your monthly income on eating out.

If you have a hard time meeting your needs on this budget, you should cut back on eating out (thereby saving 4%-5% every month) until your bills get under control.

A Reasonable Grocery Budget For Two

According to the USDA, a two-person household on a moderate budget should expect to spend around $607 each month on food. If the couple plans to have children, the pair should set aside at least $1000 a month for groceries.

The Average Grocery Bill For One Person

Although everyone’s financial situation is different, the USDA offers general recommendations for the average grocery bill for one person.

The agency recommends that a young adult woman should budget around $206 for groceries every month. A young adult male should aim to keep a budget of around $298 for a moderate diet every month.

The Bottom Line

As the brainchild of Elizabeth Warren’s bestselling book and course on bankruptcy law, the 50/30/20 rule is a simple way to allocate money to your needs, wants, and savings.

This percentage-based financial plan provides the discipline needed to cover monthly expenses on everything from housing to retirement savings, and it is flexible enough to make adjustments within each category as needed.

If you prefer, use a related budgeting tool like Undebt.it to accurately calculate the designated percentages and reach your financial goals.

General FAQ

What Is A 50 30 20 Budget?

A 50/30/20 budget refers to a formula for dividing up your after-tax income to help reach financial goals. Popularized in Senator Elizabeth Warren’s book, All Your Worth: The Ultimate Lifetime Money Plan, the 50/30/20 rule provides a mathematical formula for dividing your earnings among needs, wants, and savings.

What Are The Three Categories In A 50 30 20 Budget?

A 50/30/20 budget consists of three categories. 50% Needs, 30% Wants, 20% Savings and Retirement.

Is The 50/30/20 Rule Gross or Net?

The 50/30/20 budget rule refers to after-tax income (Net take-home pay). It is a strategy for how to budget your net income after paying any taxes owed.

What Is The Savings Rule?

The savings rule is a conventional rule of thumb published in The Richest Man in Babylon in 1926. As the brainchild of author and businessman George Samuel Clason, this rule dictates that a person should devote at least 10% of income to savings.

Does The 50 30 20 Rule Include My 401k?

The 50/30/20 rule includes the 401k under the “savings” budget category. According to the rule, you should devote 20% of your income to savings (including retirement savings).

About The Author

Ryan Luke

Ryan Luke is a father of three, husband, financial coach, and full-time police lieutenant. His inspirational story about his struggle to make ends meet, to paying off his home in less than 10 years, has been featured on MarketWatch and other media outlets. To learn more about Ryan or to send him a message, visit his contact page here.

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