The 50/30/20 rule splits your budget into three categories: 50% of your after-tax income pays for your needs, 30% pays for “wants," and 20% covers goals. Many learned of the strategy from Elizabeth Warren, the U.S. senator and former Harvard Law professor, who wrote about it in her 2005 book, All Your Worth: The Ultimate Lifetime Money Plan.

The 50/30/20 rule is just one way to approach your monthly finances. Compared to other approaches like zero-based budgeting, a 50/30/20 approach demands less detail, making it easier to follow. Other strategies, like reverse budgeting, prioritize savings first and expect you to fit your spending into what’s left over.

50%: needs

When it comes to budgeting (or life), needs must come first. So, what is a need, exactly? It’s something you must have to survive, such as food, shelter, transportation, and utilities. 

Needs can vary from person to person, but they typically include:

• Housing
• Groceries
• Transportation (gas, maintenance, public transit, etc.)
• Utilities
• Insurance
• Clothing

Some needs go beyond your physical requirements. You should also include debt payments like student loans or minimum credit card payments in your needs since on-time payments help maintain good credit. Childcare can be a significant cost on your needs list if you have children. 

But how do you know how much to budget for your needs? Keep track of everything you spend for two to three months. Not only will this give you an idea of what you’re spending, but it can also show you how some categories fluctuate. 

For example, your heating bill will likely be higher in the winter, while your electric bill could spike in the summer because of air conditioning. Grocery prices can fluctuate. You might spend more on gas in the summer if you go on a road trip. Looking at several months of your finances helps you see how your needs can ebb and flow. 

30%: wants

Life is about more than work. The wants category makes room for fun, like restaurant meals, vacations, and hobbies. Making room for wants is not only more realistic, it can also help you stick to your budget in the long run. 

Some common wants include: 

• Restaurant meals
• Entertainment
• Activities (e.g., extracurriculars for kids)
• Travel
• Upgraded technology
• Fashion accessories
• Gifts
• Hobbies

20%: savings

Saving for the future is an important part of any budget and can help with the other 50/30/20 categories. If you set aside money every month to buy a house rather than rent, you can better control your fixed housing costs in the future. An emergency fund can also keep you out of high-interest credit card debt if your car breaks down or you lose your job. Saving for retirement also falls into this bucket.

The last 20% of your budget should be devoted to saving for your short- and long-term goals including: 

• An emergency fund of six to 12 months
• Debt repayment
• Retirement
• College savings accounts
• Saving for a major purchase, like a home

Where do taxes play into the 50/30/20 rule?

The 50/30/20 rule uses after-tax funds. Start with the money left over after federal, state (if applicable), and local taxes. If you are self-employed or a contract worker, you should set aside money to pay your federal, state (if applicable), and local taxes, plus your self-employment taxes. 

Does the 50/30/20 rule include your 401(k)?

Creating room for savings is the prime focus of using a budgeting plan like the 50/30/20 rule. If you automatically contribute to a 401(k) or other retirement account from your check, include it in the 20% savings category. Likewise, your budget should include costs for health, life, or disability insurance premiums— those count as needs.  

Is the 50/30/20 rule realistic? 

The 50/30/20 rule is a straightforward budgeting tactic—and most importantly, it’s flexible. If budgets intimidated you in the past, the 50/30/20 rule gives broad categories that allow you to customize your budget to fit your needs and goals. If you live in a high-cost area, you may have to adjust the percentages slightly to accommodate higher housing or food costs.

Not only is the 50/30/20 rule realistic, but it’s also an easy way to start analyzing what you need vs. what you want. If you struggle to keep your needs to 50% of your overall budget, you may want to evaluate ways to lower the cost of the things in that bucket. For example, splitting a house or an apartment with a roommate can help you lower your housing costs if you live in an expensive housing market. Carpooling can help reduce gas bills in your transportation category. Or maybe you can try a meatless Monday to lower your grocery bill. 

While you’re analyzing your spending, you may even find patterns that can tell you about your money personality. Maybe you tend to splurge every few months on a fancy meal out. If that’s the case, then budget for it! It’s your money so nothing is off limits— just make room for it in your budget.

Other budgeting strategies

The best budget is the one you’ll keep using. How you manage your money is a highly personal choice, and there’s a budgeting strategy for everyone. Consider one of these alternatives to the 50/30/20 plan. 

• The envelope method. Keep cash in paper (or virtual) envelopes, sorted by expense. Cash provides a clear visual cue, but it may be less practical if you typically pay with a credit card.
• The 60% solution. For this method, 60% of your budget before taxes goes to the fixed, recurring expenses that you pay every month: taxes, insurance, housing, utilities, groceries, transportation, and debt payments. The remaining 40% is dedicated to your savings goals, occasional expenses, and fun money. This is a simple, straightforward method, but it may not work if you want more detail or categories. 
• Reverse budgeting. With this method, you start with savings, then use what’s left for needs and wants. Reverse budgeting can be an easy way to focus on saving, especially if you automate your savings. The downside: it may not be realistic for those living paycheck to paycheck. 
• Zero-based budgeting. You assign each dollar a purpose and aim to reach a zero balance each month. This method can help you spend with intention, but it can be time consuming to account for every dollar.

Author details

Rachel Murphy has written about personal finance for Investopedia, Forbes, and Money, among others.

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