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Everything you need to know about the 50/30/20 budget rule

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6 mins

If you’ve read any articles or books that list the fundamentals of managing your personal finances, you’ll find having a budget at or near the top of just about every list. Knowing where your money goes is essential to paying your bills today and saving money for tomorrow.

But, how exactly do you set up a budget? There are several theories and strategies for you to follow. How can you tell which is right for you?

Let’s look at one that is still very popular today, known as the “50/30/20 rule.” We’ll see how it works and compare it to several other budgeting strategies. You can then decide whether to use it, scrap it, or just think about it.

What is the 50/30/20 rule?

The 50/30/20 rule was popularized by Massachusetts senator Elizabeth Warren and her daughter, Amelia Warren Tyagi, in their book All Your Worth: The Ultimate Lifetime Money Plan. Senator Warren was a Harvard law professor when she and her daughter coined the term.

The rule is quite simple to follow.

First, determine what your take-home pay is every month. If you have money taken out for a retirement plan, add that back in. If you make estimated tax payments, take that amount out of your monthly income. If part or all of your pay is commission-based, use a three-month average to calculate your take-home pay.

Next, calculate your spending for three categories: needs (mortgage/rent, utilities, food, insurance, etc.), wants (dining out, movies, travel, etc.), and financial goals (retirement, buying a home, replacing a vehicle, etc.) Multiply your take-home pay by 0.50 for needs, 0.30 for wants, and 0.20 for financial goals (50/30/20). You can then see how much you should spend monthly in each category.

For example, let’s say you’re single and your take-home pay is $4,500 per month, but you contribute $500 per month to your company’s 401(k) plan. Add that $500 back into your take-home pay, and you’ll now have a net monthly income of $5,000 for purposes of the 50/30/20 rule.

Using the rule and multiplying your take-home pay by the factors shown above, you’ll allocate $2,500 towards your needs, $1,500 towards your wants, and $1,000 towards your financial goals.

After doing this, make a list of all your monthly expenditures and compare it to your allocated amounts. You’ll then be able to see if your spending is in line with where it should be in each “bucket.”

Using the example above, if you have $1,500 per month allocated for your wants, but you’re spending $1,700 every month on dining out and entertainment, you’ll have to reduce your spending on wants next month. Using a budget tracking tool like Mint or Quicken can help you stay on top of your spending.

[ Related: 13 best personal finance tips to help you master money ]

Does the 50/30/20 rule work?

While the rule is very straightforward and can help you establish some sense of order with your finances, there are several flaws with this strategy.

One factor that impacts the practicality of this rule is where you live. If you live in a large city with a high cost of living, your numbers may not be as realistic as they will be for someone living in a smaller city.

For example, the average rent in Manhattan for a one-bedroom, one-bath apartment in June 2022 is $3,965 per month. Using the 50/30/20 rule, to meet this single “need,” your monthly take-home pay would have to be just under $8,000 per month. After adding in your monthly cost for other necessities like food and insurance (health, life, and long-term disability insurance), you can easily be priced out of living in NYC.

Conversely, the average rent for a one-bedroom apartment in Omaha is $1,015 per month. Though this is much lower than the rent in Manhattan, it’s still not considered “affordable” by the National Low Income Housing Coalition for rent in Nebraska, which they calculated as $468 per month for a worker earning minimum wage in 2021. Someone living in Omaha who makes minimum wage would not be able to satisfy Warren’s rule.

Another flaw with the 50/30/20 rule is that 20% may not be an ample percentage for financial goals. For example, someone saving up to buy an average home in San Francisco ($1.6 million in June 2022) will need to save $320,000 to afford a 20% down payment. Even for a couple taking home $150,000 per year, it would take over ten years to save up to buy that home, assuming they had no other financial goals, like retiring someday.

Budgeting alternatives to the 50/30/20 rule

If the 50/30/20 rule isn’t realistic for you, but you’re still determined to live on a budget, there are a couple of other strategies you can try.

Zero-based budgeting

This strategy is much less restrictive than Warren’s rule. With this budget, write down everything you spend each month on needs, wants, and financial goals without applying any percentages to your spending. Regardless of how much you spend and what you spend it on, your total should end up at or above zero every month. If it doesn’t, you make the necessary spending reductions or increase your income.

Reverse budgeting

Traditional budgets are based on paying your bills first and putting anything left over into savings. Reverse budgeting is just the opposite; you “pay yourself first” by taking a preset percentage or dollar amount and putting that amount into savings, then you pay your monthly essentials and have fun with anything left.

The 60% rule

If you pick this strategy, you’ll deliberately keep your monthly needs (mortgage/rent, utilities, food, etc.) under 60% of your take-home pay. The remaining 40% is split evenly between retirement, short-term savings, long-term savings, and “fun money.”

70/20/10 rule

This strategy is a variation of the 50/30/20 rule: 70% of take-home pay goes towards needs, 20% towards wants, and 10% towards financial goals. This version of the rule works better than the Warren’s if you live in an expensive area or have a lower income and are being hit hard by inflation.

Which is the right budgeting strategy for you?

You may have to try several different strategies before landing on one that works for you. You’ll know you’ve found it when you’re able to comfortably pay your monthly expenses, you’re saving at least 10% of your income for retirement, and you have a little extra left each month to occasionally enjoy a nice meal out or take a vacation every year or two.

[ Related: 7 of the best personal finance books to add to your reading list ]

The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.

— Published June 6, 2022
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