What is the 50/30/20 Rule?The 50/30/20 rule is a percentage-based budget that splits your monthly net income into three categories: needs, wants, and savings.
- 50% goes towards needs: This includes any fixed or variable expenses you pay each week or month. Examples of needs are mortgage/rent, credit card minimums, utility bills, auto loans, groceries, and child support payments.
- 30% goes towards wants: Wants are things you don’t have to have, but that you still spend money on. This includes things like travel expenses, clothes shopping, dining out, holiday shopping, and monthly subscription services (ex. Netflix). Other things that go in this category are non-essential upgrades like a luxury vehicle or a new home entertainment system.
- 20% goes towards savings: The rest of your income should be used to save money or set up an emergency fund. The emergency fund should be enough to cover 3 to 6 months’ worth of expenses. That way, you’ll be prepared for financial hardships such as a lost job or sudden medical expenses. This category also includes investing in your future or planning for retirement.
Monthly after-tax income
Savings and Debt Repayment
An Example of the 50/30/20 RuleWith the 50/30/20 budget, you divvy out your net income into three categories. For example, you take home $2,500 monthly after taxes. In this case, you would split your paycheck as follows:
- 50% or $1,250 for needs – house payment, utilities, loan payments, groceries
- 30% or $750 for wants – fun/entertainment, gym memberships, etc.
- 20% or $500 for savings and investing – emergency fund, long-term financial goals, retirement planning
- 50% or $1,875 for needs
- 30% or $1,125 for wants
- 20% or $750 for savings and investing
Why the 50/30/20 Rule Generally WorksOne reason why the 50/30/20 rule usually works is because it’s so straightforward. Unlike other personal budgets, you only need to focus on three categories – needs, wants, and savings. This makes handling finances a lot less stressful and more concrete, especially for those new to budgeting. Plus, this budge rule has some wiggle room as it lets you take some money from other categories as needed on a month-by-month basis. Typically, the result is that you can make a budget that works for you. There are many budget rules of saving money. But this particular one dedicates a large percentage – 20% - of your income to doing just that. This makes the 50/30/20 rule especially useful for people who need to start preparing for big-ticket items like a house. Finally, since 30% of your income is dedicated towards wants, this budget makes spending money a hassle-free experience, too. That said, you still need to track your budget. Otherwise, you could end up overspending.
Importance of SavingsSaving money is important for several reasons. For one thing, it gives you peace of mind knowing you’re prepared for an emergency or unforeseen expenses. This could be anything from a sudden medical bill to a lost job or a damaged roof. Every household should prioritize creating an emergency fund that can cover 3 to 6 months of their total expenses. This money should only be used for emergencies and should be kept separate from your regular savings. By having this money, you won’t have to draw from your regular income to cover these costs. If you have enough money set aside, you also might not have to take on other forms of debt. Even if there aren’t financial emergencies, having savings can give you a sense of financial security and reduce the stress of the unknown. It can also make it easier to build wealth or purchase big-ticket items in the future. And it can make investing in your future or a retirement account more feasible.
ConclusionUltimately, the 50/30/20 budget is a great way to start budgeting your finances, while preparing for a more financially stable future. It’s a straightforward, no-frills type of budget that can work with almost any income or lifestyle. By following it, you can also reduce financial stress, build wealth, and potentially avoid debt. With this budget rule, 50% of your net income goes towards needs, 30% goes towards wants, and 20% goes towards savings. There are a lot of budgeting rules for saving money. This one, though, stands out because it can help you get ahead of financial emergencies while still having money for fun.