No more tracking pennies.
What comes to mind when you hear the word “budget?” A spreadsheet full of decimal points? A notebook with every purchase documented down to the cent? While that works for some people, it might not work for the rest of us. But don’t worry, there are other ways to manage your spending.
Try the 50/30/20 budget. It divides income into three categories: needs, wants, and savings. It’s a simple rule and one that can help you take control of your spending and save for financial goals.
So say goodbye to tracking pennies. Here’s how the 50/30/20 budget works, and whether the flexibility it offers might be right for you.
What is the 50/30/20 budget?
The 50/30/20 budget is a financial plan that helps people manage their money. It was popularized by Senator Elizabeth Warren in her 2006 book, “All Your Worth: The Ultimate Lifetime Money Plan.”
The rule states that you should divide after-tax income into three categories: needs, wants, and savings. The first 50% goes to needs, including financial obligations. The remaining half is further divided into 30% for wants and 20% for building savings and paying off debt.
How does the 50/30/20 budget work?
The rule is simple — divide your after-tax income and allocate it as follows:
- 50% on needs
- 30% on wants
- 20% on savings and debt
50% needs
Ideally, no more than half of your income should go to needs, which are essential expenses and obligations. This includes shelter, transportation, food, and health. More specifically, it refers to paying rent or mortgage, utilities, gas, groceries, health insurance, and minimum debt payments. Yes, debts are considered a need, but only the minimum payments that are due. Extra payments are lumped into savings, as you’ll see later in the article.
If you’re breaking the bank on needs, take a realistic look at your lifestyle and downsize where necessary. Remember, must-haves don’t include add-ons, such as dining out, an expensive apartment, a new car, or subscription services like Netflix or Spotify. Consider trimming these extra costs. If you can’t reduce your needs, you will have to cut from your wants.
30% wants
The 50/30/20 budget allocates 30% of your income to want expenses — basically fun money. Wants are costs that are non essential but often make life more enjoyable. This includes dining out, attending concerts, movies, vacations, the latest electronics, and luxury items. Think of wants as the add-ons you excluded from the needs bucket. A want is a fancy steak dinner instead of groceries. It’s updating your cable package to include the highest internet speed and all the channels.
Expenses in the wants bucket are entirely optional. If you find it difficult to stick to a budget, the wants category is the first area you should trim since these expenses aren’t necessary. Keep the larger financial picture in perspective. Wants take lower priority than needs, savings, and debt.
20% savings
The final category is split between savings and debt. Minimum debt payments are categorized as needs, but extra payments fall into the savings bucket. These extra payments help reduce the principal balance(s) and interest owed.
In an ideal world, you’d be debt-free. But realistically, most people carry some type of debt burden, whether student loans, credit card debt, or a personal loan. Until you reach financial freedom, you need to balance savings and debt payments.
A good rule of thumb is to build an emergency fund first — $1,000 is a good start. A solid savings account will help ward off additional debt in case of an unforeseen expense, like a medical bill or a car repair. Then, turn your attention to aggressively paying off debts. Once your debt is under control, re-allocate money towards boosting your savings. Strengthen your emergency fund to cover at least three to six months worth of expenses. Finally, focus your attention on increasing retirement savings and meeting financial goals, like homeownership.
Is the 50/30/20 budget right for me?
The 50/30/20 budget is a useful method to pay bills, save for emergencies, and have money left over for fun. It has two key strengths:
- It’s simple and flexible. Divide a percentage of your income into three major categories: wants, needs, and savings. Ultimately, the percentages are up to you and your financial situation.
- It prioritizes saving. This budgeting method allocates a percentage of funds directly to an emergency fund or a retirement account. It takes the idea of “paying yourself first” to another level.
Here are other pros and cons of the 50/30/20 budget.
Pros
- Simple: Instead of endless expense categories, income is divided into three buckets.
- Flexible: You’re free to spend your money however you’d like, as long as you don’t spend more than the designated percent for each category.
- Realistic: It’s easy to cut expenses to the extreme when budgeting — basically all or nothing. This method makes sure you set aside fun money so you can still indulge in little pleasures.
- Effective: Many Americans spend the majority of their income on housing and debt. By allocating income according to percentages, you can easily track which areas are eating up your budget and then make adjustments to free up money.
Cons
- Risk of overspending. Allocating 30% of your income for non essential wants is a large amount of money, especially when compared with only 20% toward savings. Try not to spend money on things that aren’t important. Remember, long-term financial health is based on having few or no debts and a well-funded savings account.
- Not rigid. People often struggle to manage their money because they lack a financial plan. This budget is a great start, but it isn’t as structured or as detailed as the zero-based budget, for example.
How to implement the 50/30/20 budget
We spoke to Kyle Boze, a financial literacy educator at Kettering Fairmont, about tips to use the 50/30/20 budget successfully. His recommendation is to use it as a guide, rather than a rule since it has limitations.
First, Boze explained the idea of wants versus needs is too simplistic, and often the line between the two blurs. It’s important to clarify the difference between the two.
“A better way of labeling the two is: living essentials (50%) and lifestyle choices (30%),” Boze said.
Treat 50% and 30% like maximums and 20% as a minimum, Boze said. It’s often possible to minimize wants and needs, but you shouldn’t sacrifice paying off debt and saving for the future.
“As we grow older, our goals and income in life tend to change,” he said. “As your income grows, you should theoretically not be utilizing near the 50% max and 30% max. But since the rule is rather rigid — a lot of people continue spending up to 80% of their income, even when it can become wasteful.”
Don’t get too hung up on the percentages. It’s more important to prioritize saving and debt payments than wants, or lifestyle choices as Boze said. Also, always be ready to adjust your budget when your income or spending changes.
“Individuals should consistently review and analyze their budget to match their long-term goals,” Boze said. “Especially within the 30% for wants — that is a considerable amount of money spent on things not essential to your quality of life, and can interfere with savings and investing goals you have.”
Ultimately, do what’s best for your financial situation. People have different incomes, goals, and life factors that affect their finances, he said.
Factors that influence your 50/30/20 budget
We also spoke to Dr. Tenpao Lee, a professor of economics at Niagara University, who offered his expertise. According to Dr. Lee, the 50/30/20 rule is not universal — one size doesn’t fit all. It can, and should, adjust based on a variety of personal factors.
Age
Those who are older than 50 years old and closer to retirement will likely want to save more than the designated 20%. In fact, the government allows individuals over 50 to make catch-up contributions toward retirement, Dr. Lee said. In 2023, these limits are $7,500 for IRA and $30,500 for 401(k) starting in 2024.
Income
The amount you allocate to each category is largely determined by your income. And the 50/30/20 budget might not be suitable for those with limited funds who are living paycheck to paycheck. For instance, a family of four with a low household income may not be able to save the full 20% after paying essential bills, Dr. Lee said. And that’s okay, 50/30/20 budget is customizable. If the percentages don’t work for your financial situation, try a 60/20/20 or a 40/20/40 budget instead.
Wealth
Your need for savings may correspond to the amount of wealth and assets you have. For instance, a “house is a major asset and can be considered as a long-term investment,” Dr. Lee said. “Owning a house with a mortgage can be viewed or counted as a portion of your savings.”
Family
The size of your family may affect your ability to save money. ”Each of us has a life cycle and also a family cycle — single, married, with kids, kids grown up, empty nest, retirement, etc. — which will affect your saving ability and life quality,” Dr. Lee said.
Security
Job security is a huge determinant of how much money you should save. Experts often recommend that your emergency fund should cover between three and six months of expenses. However, if you work in a field that isn’t secure or doesn’t guarantee a steady paycheck, then this amount should be higher.
Risk
How tolerant are you of risk? “Each of us has different value judgment,” said Dr. Lee. "Some prefer to spend money now, some prefer to save more for the future.” Determine if you feel secure and comfortable with your current financial situation — this may determine the percentage you spend and save.
Goals
Think ahead to the next five years. What expenses do you foresee? Your behavior should change depending on expected financial obligations, such as purchasing a house or car or preparing for a child’s college tuition, according to Dr. Lee.
The bottom line
The 50/30/20 budget is a flexible money management system that prioritizes needs, wants, and savings. View it as a guide rather than a rule, and customize it based on your ever-changing financial needs.
Article contributors
Kyle Boze is a teacher of financial literacy and leadership at Kettering Fairmont High School in Southwest Ohio. Boze is a former corporate director of marketing who made the transition to education. He is passionate about the impact financial education and leadership have on young adults.
Dr. Tenpao Lee, Ph.D., is a professor of economics at Niagara University. He was a Fulbright Scholar to Taiwan in 2001 and a Fulbright Senior Specialist from 2002 to 2009. In 2013, Dr. Lee was named a Distinguished Visiting Research Fellow by Jianghan University in Wuhan, China. In 2015, he was awarded the title of Shanghai Distinguished Overseas Professor by the Shanghai City Government, China. Dr. Lee's research focuses on the impact of globalization on the economy. He was the editor of the International Journal of Intellectual Property Management.
