50/30/20 Budgeting Rule: What is it [Complete Guide]

Are you struggling to stay on track with your budget? Tired of comparing all the detailed categories? The 50/30/20 rule can be a great tool to keep you going!

After quite some effort you have tried budgeting and you know how much you spend in each category. That’s a great start, congrats!

If you’re not tried budgeting yet, I would recommend you start tracking where your money goes. There are several reasons you want to start a budget, staying on top of your money is one of them. 

When you have a budget, the next step is comparing how your budget compares to the ‘ideal’ saving and spending. That’s exactly what the 50/30/20 rule is for. 

Simply said: you spend 50% of your budget on needs, 30% on wants, and 20% on savings and debt payoff. 

It is a great concept but as with any concept, it doesn’t work for everyone. If you are working towards early retirement, for example, these numbers need to be a tad different. We will get into the details later, no worries. 

In this article, you will learn what the 50/30/20 rule is, how to use it, and whether or not it will work for you. Let’s dive right in!

50/30/20 Budgeting Rule What Is It & A Step-By-Step Guide
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What Is The 50/30/20 Rule?

U.S. Senator and Harvard bankruptcy expert Elizabeth Warren talks about the “50/30/20 rule” in her book All Your Worth: The Ultimate Lifetime Money Plan. 

This budgeting rule breaks down the ideal spending of your after-tax income. The allocation is as follows:

  • 50% on needs, like groceries, utilities, and housing costs
  • 30% on wants, which includes all luxuries
  • 20% towards debt and savings. 

While this rule is definitely not going to work for everyone, it is a great starting point. It provides you with some general guidelines and a point on the horizon where you can aim at. 

Once you’re there, you can further optimize and adjust your costs. 

How To Use The 50/30/20 Rule?

When you’re wanting to use the 50/30/20 budget rule, there are a few things you need to do. First, you need to calculate your after-tax income. Then you lower your expenses in such a way that you spend 50% on needs, 30% on wants, and have 20% left to save and pay off debt. 

Let’s discuss it in more detail. 

Step 1: Calculate Your Income After Tax

Calculating your after-tax income is the first step. 

Doing this is simple if you have a regular paycheck month-to-month. You take your paycheck and exclude all taxes and social security contributions. If any health care or retirement contributions are done, you add them back in. 

If you have your own company, after-tax income is your total income minus your expenses. When you have the amount, deduct the necessary taxes that you need to pay. 

If you’re responsible for submitting your own taxes, don’t forget to put them into a separate account so that you will not touch it. 

Now you have your after-tax income!

Step 2: Get Your Needs To 50%

Anything that you need, are things that you need to pay every month otherwise your quality of life will suffer.

No, I’m not talking about your Netflix subscription. 

I’m talking about your life would be negatively affected if you would not have it in your life, a primary need will not be fulfilled. 

Ask yourself: how would my life look without it? 

How would your life look without health care? Sky-high medical costs when something happens to you or your family. Having healthcare is definitely a need. 

How would your life look if you didn’t pay your minimum on your debt? You would get penalties, extra fees, and you will need to pay more eventually. The minimum amount is a need. Anything above that is a want.

You can take this approach to everything else as well. 

What are the things that fit into the needs category:

  • Housing costs – like rent, your mortgage
  • Utilities – like electricity, gas, water, internet
  • Groceries
  • Health care
  • Transportation costs
  • Minimum debt payoff
  • Minimum clothing

When you want to calculate how much rent you can afford, a rent affordability calculator may be your best bet!

Need Or Want?

It can be hard, especially in the beginning, to really know if something is a need or a want. Asking yourself the question: ‘how would my life look without it?‘ can definitely help.

If the difference is not so clear for you yet. Let’s go over a couple of extra examples.

When you don’t get the cheese and wine at the supermarket, that’s a small inconvenience. When you don’t have enough food for dinner, that means a need is not being met. 

Anything that is a primary need, you want to have that covered. Things like health care and water are for sure primary needs. The quality of your life would drastically decrease would you not have that. 

One thing that is important to take into account as well, is your minimum debt payments. If you don’t pay that minimum balance for your car or for your credit card, this will negatively impact your life. 

While your minimum payoff is considered a need, any additional amount that you put towards your debt is not. 

When you have all these costs, calculate how much of your after-tax income they take in. 

You can do this by: ‘Needs category total spending’ divided by ‘after-tax income’. 

Ways to get your needs down to 50%:

Step 3: Get Your Wants To 30%

Anything that is not a necessary expense for you, it goes into this category. 

Things that fall into this category are optional, things that you can live without but would rather not. 

If you’re going hard on lifestyle inflation and are used to the luxuries you have in life, it can be very difficult to deflate your lifestyle again. 

The wants category often includes things that you are used to living with and you are quite used to. Even though they are not needed, you will probably won’t see them as wants. 

This could be anything that you don’t really need, for example:

  • Going out to eat
  • Having cable TV
  • Having your subscriptions to streaming services
  • Gifts
  • Going on a (far-away) holiday
  • Entertainment

The rules make sense once you think about it, it is simply a change in mindset. 

How to reduce your wants to 30%:

Step 4: Spend 20% Of Your Income Towards Savings And Debt

At least 20% of your after-tax income should go to repaying various debts and saving or investing. 

Good thing is that the minimum payment of your debt goes into the 50% needs category. Things like a minimum car payment, mortgage payment, and minimum credit card payment all go there. 

Anything that you choose to add to that, goes to the 20% category. 

If you have not yet set up an emergency fund, I recommend you start there. It is great not to go into extra debt when you have an unexpected emergency comes your way. 

Emergencies always seem to come at the worst possible time. Prepare for it and don’t ever worry about it again!

If you’re working towards financial independence and/or early retirement, this is also where this goes. Depending on your timeline, you may want to speed things up a bit. If this is your situation, we will go into that with the next point. 

Will The 50/30/20 Rule Work For You?

With this budgeting system, there are just three categories that you need to pay attention to. For some people, this will be great. They don’t like the detailed budget and it takes them too much time. For other people, it will be hard to see where you can improve your budget. There are only three categories. 

The 50/30/20 rule works for many people. As with anything in personal finance, it is personal whether or not this will work for your specific situation. 

The most important thing is that it fits your goals and your needs, so ask yourself if this would work for you. 

It Won’t Work If You’re Working Towards Financial Independence

If you’re working towards FIRE (financial independence and retire early) it may be hard to get there when you save only 20%. 

I know many people who are working towards FIRE and are saving anywhere between 40-60% of their income. Some higher, some lower. It depends highly on your earnings and how much you’re spending on the big three – housing, transportation, and food. 

If you want to earn some extra money, it may be a good idea to start a side hustle. There can be many different things that you want to do. You can work as a virtual assistant, sell the stuff in your house, start a blog, and much more. 

When you want to earn some extra money through a side hustle, here are some of my favorite side hustle:


When you’re not into the nitty-gritty of your budget, the 50/30/20 budgeting rule may work for you. There are only three categories that you need to track, which makes you focus on the overall numbers. 

A lot of people love it! It is great when you want to get a hold of your spending and bring your spending down to the designated categories. 

Do you use the 50/30/20 rule?

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