Budgets — they’re pretty darn helpful. Whether you’re working with a spreadsheet, pen and paper, or an automated finance app, having a tried-and-true budgeting method can help you navigate your personal finances. 

If you’ve ever looked into budgeting strategies, you’ve probably heard of the 50/30/20 rule. Embraced by finance pros and new budgeters alike, it’s an easy way to divide your monthly expenses by category.

So what exactly do the numbers mean?

The three parts of the 50/30/20 rule

  1. Needs — 50% (or less) of your income should go toward needs, like food and housing
  2. Wants — 30% of your income should be spent on the things you want
  3. Savings & Debt — put the last 20% of your income toward a savings account, investing, and/or paying down debt

Ready to see if the 50/30/20 rule is right for you? Let’s dig into it. 

How does the 50/30/20 rule work?

The beauty of the 50/30/20 rule as a budgeting method is that it’s not a rigid system. By dividing your budgeting categories into just three buckets, the 50/30/20 rule lets you tailor your budget to your lifestyle and living expenses, giving you plenty of room to tweak it as needed. 

The simplicity of this rule of thumb makes it the ultimate contender for those who want to have a budget without constant oversight. 

Let’s take a look at the three categories of the 50/30/20 rule and see how the big picture breaks down:

1. Needs (50%)

All humans have needs — we need food, water, shelter, and sleep to thrive and survive. In primordial times, our primitive ancestors lived a hunter-gatherer lifestyle and slept in caves, but nowadays, we have the luxury of “gathering” at Whole Foods and heading home to crash on a memory-foam mattress. 

Add in the advent of modern health care, and we’re not doing too bad, right?

Our needs, however, cost money! As the first (and largest) category of the 50/30/20 rule, you should plan on spending 50% of your take-home pay after taxes on your needs. Exactly what falls under this umbrella differs from person to person, but the category typically contains expenses like:

  • Groceries and food expenses
  • Rent or mortgage payments
  • Health insurance
  • Car payments
  • Utilities and internet

2. Wants (30%)

Wants — we all have things we want. We want things that catch our eye, pique our interest, bring us joy — things that make our life better (or easier) and make us happy. The 50/30/20 rule generously accounts for our wants, allotting a hefty 30% of after-tax income toward buying things we like. 

How you decide to break down your wants is up to you — we all want different things, after all! Some potential categories to consider and put into your wants category can include:

  • Subscriptions and streaming services, like Netflix or Amazon Prime
  • Entertainment budget (concerts, theater, sporting events)
  • Dining out
  • Vacations
  • Gym membership
  • Clothing or home goods

3. Savings & debt (20%)

If you’re currently carrying debt, you’re in good company with the majority of Americans. The final piece of the budgeting puzzle in the 50/30/20 rule puts the remaining 20% of your after-tax paycheck toward debt payments — credit card debt, student loans, etc. — to pay those debts down. 

Getting out of debt can help you avoid negative credit scores, put yourself in a good position to be approved for a home or car loan later on down the road, and perhaps most importantly, stop shelling out your hard-earned money to pay interest to your creditors.

If you aren’t carrying any high-interest debt, put that 20% toward your savings and investments instead. That includes:

  • Building an emergency fund 
  • Creating savings goals for big purchases, like a down payment for a car or house
  • Retirement account contributions, like your 401(k) or IRA

Steps to creating your own 50/30/20 budget

Here’s how to set up a 50/30/20-rule budget and stick to it:

  1. Calculate your monthly take-home pay
  2. Split your spending into Needs, Wants, and Savings
  3. Create a monthly budget using the 50/30/20 template
  4. Add any upcoming expenses 
  5. Track your spending habits to catch any overspending
  6. Check in with your budget regularly

Let’s break it down, shall we?

1. Calculate your monthly take-home pay

The first step is to figure out just how much you’re bringing home after taxes. Take a look at your paystubs or bank statements to see how much is being deposited into your bank account on payday. If you’re paid twice a month, multiply it by two. If it’s a weekly check, multiply by four. 

If your income varies (maybe you’re a contractor or you work in the service industry and rely on tips), estimate your monthly income by averaging how much you’ve brought in over the course of the past three months. Make sure you estimate conservatively!

2. Split your spending into Needs, Wants, and Savings

Figure out how you spent your money last month by looking through your records. If you use a combination of banking apps and spreadsheets, that could take some time. But if you use an app like Simplifi by Quicken, your spending is categorized for you automatically.

Either way, you’ll want to get a comprehensive overview of your spending habits. You’ll also want to identify your debt repayment and savings contributions to get a full picture of your income, expenses, and cash flow. 

3. Create a monthly budget using the 50/30/20 template

As long as you didn’t have any huge, abnormal expenses last month (like a new transmission for your car or replacing your central AC), you can use last month’s spending as a template for your new budget.

Categorize your monthly expenses into wants, needs, and savings or debt repayment, and make sure your expenditures fall in line with the 50/30/20 breakdown. 

4. Add any upcoming expenses

If there are any unusual expenses on the horizon, make sure you account for them in your new budget. For example, maybe you pay your car insurance in full every 6 months. To account for that, divide those payments by 6 and include that amount in your monthly budget. (Give it a bit extra if that payment is due soon.)

You can also handle upcoming expenses by making sure you include some short-term savings in your budget as part of that 20%. That way, you’ll always have something set aside for larger, less frequent bills as well as life’s little surprises.

5. Track your spending habits to catch any overspending 

Once you’ve got your budget locked in, you’ll want to watch your monthly spending habits to make sure you stay on track. Keeping up with your new budget can help you curb overspending and keep an eye on those nonessentials.

If you notice that your Needs exceed 50%, that’s okay — you’ll need to realign and perhaps (temporarily) borrow from your Savings or Wants categories. If you find yourself exceeding the 30% cap for Wants, you’ll need to address your overspending and reign it in. And if you feel that 20% isn’t adequate to pay off your debts, you might decide to borrow from the Wants category for that, too. 

Remember, the 50/30/20 “rule” isn’t a steadfast regulation. It’s just a rule of thumb that’s meant to make your life easier!

6. Check in with your budget regularly

If you were hoping for a set-it-and-forget-it budget, we’ve got some unfortunate news — sticking to any budget means checking in regularly. Whether it’s monthly, weekly, or even daily, you’ll want to monitor your budget to stay on track and keep working toward financial freedom. 

An app like Simplifi can make that a lot easier, helping you stay on top of your finances in under 5 minutes per week! 

Is the 50/30/20 rule right for you?

All budgets are not created equal. People are all unique — with unique sets of goals, interests, and values — and our budgets need to reflect that. So, be sure to consider your lifestyle and financial goals when deciding on your budget.

The 50/30/20 rule is perfect for people who love simplicity. 

It’s also a great option for people without a high debt-to-income ratio; 20% might not address your needs if you’re carrying a lot of debt. 

The 50/30/20 rule may not be ideal if your finances are more complex. 

Since the method isn’t meant to be a precision budgeting rule, the guidelines of where your money goes are quite broad. While broad categories may work some, the lack of a prescriptive strategy may not be sophisticated enough for those with very specific financial goals, like “financial independence retire early” (FIRE) or entrepreneurs looking to start multiple businesses.

If you’re not quite sold on the 50/30/20 rule, no worries! There are plenty of other budgeting methods out there, like: