The 50 30 20 Budget Rule Explained [Ultimate Guide]

A 50 30 20 budget refers to a formula for dividing up your after-tax income to help reach financial goals. 

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

The Three Categories In A 503020 Budget

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. 

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. 

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. 

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. 

How To Set Up A 50/30/20 Budget

Step One: 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. 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.” Your wants should take up no more than 30-percent of your after-tax income. 

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. 

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