50/30/20 Budget Rule: How It Works and Examples (2024)

If you're jealous of other people's knack for saving—while most months you come up short—a budget is a must.

There are countless ways to structure a budget, but one of the simplest approaches is following the 50-30-20 rule. It's a straightforward and stress-free way to handle your bills, have some fun and still stash some cash for your long-term financial goals.

What Is the 50/30/20 Budget Rule?

At its core, the 50-30-20 rule divides your income into three distinct categories:

1. Needs

2. Wants

3. Savings

The numbers 50/30/20 in this budget rule refer to the percentages of income that you allocate to needs, wants and savings, respectively. This division creates a clear delineation of where your money should go each month.

Start by calculating your net monthly income after taxes. Then, allocate 50% to cover essential needs such as housing, food, transportation and utilities. Designate the next 30% for discretionary spending on wants, like entertainment, dining out and travel. Finally—and crucially—earmark the remaining 20% for long-term savings, including contributions to retirement accounts and debt repayment.

The 50/30/20 rule makes budgeting less of a chore. It provides a simple yet effective way to manage your day-to-day expenses, allow for guilt-free spending on discretionary items within reason, and encourage saving for the future.

Breaking Down the 50/30/20 Budget

Not sure which of your expenses are considered needs vs. wants, or what to do with your newfound stash of cash? Here's a rundown of some common costs and how to divvy them up for the 50/30/20 rule—plus a range of options for the savings category.

Needs (50%)

• • Housing: Monthly rent or mortgage payment, condo fees and/or property taxes, if applicable
• • Utilities: Heat/air conditioning, electricity, water, phone, internet
• • Groceries: Food items purchased from supermarkets, greengrocers, specialty retailers, big-box stores or online (meal prep services are wants)
• • Household and personal items: Cleaners, toiletries, medications, etc.
• • Transportation: Public transit, taxi/rideshare, and/or gas, maintenance, parking and auto insurance if you own a vehicle
• • Clothing/shoes: Essentials only, such as worn-out items that need to be replaced (nonessential clothing items are listed below)
• • Minimum monthly debt payments: Including car loans, student loans, personal loans, lines of credit and credit cards

If you cannot currently cover your essential monthly bills with 50% of your net income, consider these strategies to reduce costs in this category:

• • Move to a more affordable area, downsize living arrangements or get a roommate.
• • Adjust the thermostat before you leave home, fix drippy faucets, etc., to lower energy/water use.
• • Negotiate a discount on your phone/internet services or find another provider with better rates.
• • Plan meals before you grocery shop to take advantage of sale items and minimize food waste.
• • Use public transportation or carpool, if possible, instead of owning a car.
• • Do clothing swaps with friends and family.
• • See if you can consolidate your loans to get a lower interest rate.

Wants (30%)

• • Entertainment: Cable/streaming services, movies, concerts, sporting events, theater
• • Gym memberships/subscriptions: Including meal prep services, magazines, etc.
• • Dining out: Restaurants/bars/cafes, takeout, food delivery services, etc.
• • Shopping: Nonessential clothing and shoes (including designer labels), tech gadgets, gifts, jewelry, watches
• • Travel/vacations: Overnight trips, family vacations, etc.

While it's important to enjoy life, prioritize wants judiciously to ensure they align with your financial goals. Look for ways to accommodate your interests without overspending, such as finding free or low-cost activities in your community or canceling services or memberships you don't use regularly.

Savings/debt repayment (20%)

• • Create an emergency fund.
• • Contribute to an IRA, 401(k) or other retirement savings account.
• • Pay off credit cards or other revolving debt.
• • Make extra mortgage (or other loan) payments.
• • Invest in a diversified, balanced portfolio that matches your tolerance to risk.

If you're trying to decide which of the above to prioritize, consider what will give you the most bang for your buck. For example, regularly contributing to an emergency fund in a high yield savings account will pay you a competitive interest rate on your deposits. It may also keep you from having to take on high-interest debt when unexpected expenses come along.

Similarly, consider how much you'd save in annual interest by paying off a credit card, student loan or mortgage, and compare that to the likely average annual returns of other saving or investment products. And be sure to take advantage of any contribution-matching program your employer offers on retirement savings—it's hard to beat a 100% rate of return!

How To Use the 50/30/20 Budget Rule

Start by looking at your current spending habits and creating a list of all your monthly expenses. Then, separate them into needs and wants, and add up each group separately to see your total spending for each category. Next, calculate your monthly income, as well as the corresponding target amounts under the 50/30/20 rule.

50/30/20 budget rule examples

Here are a few examples of the 50/30/20 rule financial breakdowns at various incomes:

Finally, see how your current spending measures up to the targets, and look for ways to cut back as necessary (as explained above).

Keep in mind that these figures are just a guideline—they can be tweaked to suit your circumstances. For example, those with very low incomes or who reside in areas with a very high cost of living may find they need to spend more than 50% of their monthly income on necessities. In that case, you might need to lower your wants and savings amounts to 20% and 10%, respectively.

Given that the personal savings rate in America is currently under 4%, even a modified version of the 50-30-20 rule could go a long way toward improving your financial future.¹ So think of the rule as a starting point, or a goal to strive for, but feel free to adapt the percentages to work for your circumstances and stage in life.

Rule Your Finances!

The most important part of any budget is tracking your spending to ensure you aren't living above your means. So, whether you use the 50-30-20 rule as is or find another ratio of spending vs. saving you can live with, you can't go wrong with this easy-to-follow budgeting strategy. By prioritizing needs, wants and savings in a balanced manner, you can cultivate healthy financial habits and work toward achieving your long-term goals.

Looking for more budgeting info?

Personal Finance 101: Budgeting Basics

What Is Zero-Based Budgeting and How Does It Work?

Learning to Budget Helped Her Find Her Footing

Tamar Satov is a freelance journalist based in Toronto, Canada. Her work has appeared in The Globe and Mail, Today's Parent, BNN Bloomberg, MoneySense, Canadian Living and others.

Sources/references

1. United States personal savings rate. Trading Economics. Accessed May 30, 2024.