One Budgeting Trick to Rule Them All: The 50/30/20 Method

What is the 50/30/20 budgeting rule?

First introduced by politician and former professor Elizabeth Warren (now the U.S. senator for Massachusetts) in her book All Your Worth: The Ultimate Lifetime Money Plan, the 50/30/20 rule is a budgeting approach that suggests you manage your spending by allocating your after-tax income as follows: 50% to cover needs, 30% to pay for your wants, and 20% to build savings and repay debt.

What exactly constitutes needs, wants, and savings? Here’s a breakdown:

Needs (50% of after-tax pay): This bucket includesmandatory bills that are central to survival. If you were to ask yourself whether you could reasonably do without these costs, the answer would be ‘no’. Examples include groceries, rent or mortgage payments, transportation, utilities, basic clothing, childcare and healthcare costs. Minimum payments on debt also fall into this category because you’re obliged to pay these to avoid negative consequences.
Wants (30% of after-tax pay): Anything that’s a nice-to-have or nice-to-do rather than a basic essential is a ‘want’. This includes money spent on hobbies, entertainment, eating out, alcohol, shopping sprees, holidays, memberships, and streaming services. It also includes costs associated with lifestyle improvements – a modest car might be a need, but the extra you spend on the latest souped-up Audi comes from the ‘wants’ pool.
Savings and debt repayment (20% of after-tax pay): This category covers anything you put towards your financial future – cash saved in an emergency or down payment fund, as well as money contributed to a retirement account or invested in stocks or bonds. Debt repayments above your minimums are also considered ‘savings’, as if you knock out balances faster than required, you cut down interest costs.

The beauty of the 50/30/20 rule is that it’s super simple, and therefore ideal if you don’t want to spend hours poring over finicky spending categories and calculations. It also guarantees that you build 20% savings into your budget – a big improvement on the average personal savings rate in America, which tends to hover below 10% – while also covering the basics and still building in room for fun.

A step-by-step guide to building your own 50/30/20 budget

1. Calculate your after-tax income

To work out how many actual dollars you should be allocating to each category, you first need a clear idea of the monthly total you’re working with (your 100%). So add up any sources of income you have – your regular salary, pay from side hustles, rental income, child support etc. – and make sure that you subtract tax wherever it hasn’t already been deducted. If certain contributions automatically come off your paycheck, add these amounts back in as you’ll want to factor them in when you tally categories in step 3.

2. Work out budget allocations based on the 50/30/20 split

Now that you have your net income, calculate 50%, 30%, and 20% of this total so you know how much you should ideally be spending in each of the three buckets. For example, if your take-home pay is $5800 per month, calculations will show that you should set aside $2900 (50%) for needs, $1740 (30%) for wants, and $1160 (20%) for savings and debt repayment.

3. Categorize your expenses to determine your current split

Spend some time tracking your outlays, or go back through your bank statements and receipts to see exactly how much of your cash is going where. Create three separate lists, and based on the category descriptions above, record all monthly costs that are ‘needs’ on the first and all monthly costs that are ‘wants’ on the second. On the third, note how much you’re currently putting towards savings accounts, investments, and extra debt payments.

Next, add up the items on each list to get totals for your three buckets. You can contrast these amounts with the “ideal” figures you calculated in step 2, but you’ll probably want to convert them into percentages of your after-tax income for easier comparison.

Your results might look something like this:

Ideal budget allocations (from step 2)

Needs: $2900 (50%)

Wants: $1740 (30%)

Savings: $1160 (20%)

Current split

Needs: $3364 (58%)

Wants: $1914 (33%)

Savings: $522 (9%)

4. Rejig your finances

When you do the comparison, you’ll likely find there’s a gap between where you are and where you should be. So make adjustments to your spending to get closer to the 50/30/20 goal. If you’re using more than 50% of your pay on needs, see if you can shift to more affordable alternatives (public transport, for example) or downsize your lifestyle slightly. If you’re overspending on wants, identify nice-to-haves you can eliminate – maybe fewer takeaway coffees and home workouts instead of gym?

Any cash you free up can be redirected to your savings bucket. To stick to 20% here, consider upping your monthly contributions and automating savings transfers after payday.

Don’t worry if it takes a few months – and many incremental tweaks – to get the balance right. Making these sorts of conscious financial changes often requires time, effort, and patience.

5. Monitor your spending closely

A budget only works if you stick to it. So you’ll want to track your spending every month going forward to make sure you’re keeping to your goals. It could be helpful to use a money-saving app or online budgeting tool that categorizes your transactions in real time and notifies you if you’re stepping outside the lines.

While discipline is key, allow yourself some flexibility here and there too. There may be some months where circumstances demand you adjust your allocations slightly. But as a general blueprint, the 50/30/20 rule does a good job of helping you divide and conquer your finances responsibly.