What is the 50/30/20 budget rule?

Creating a budget can help you make confident decisions and enjoy peace of mind. A detailed budget, though, can be complex to manage. For one easy way to plan your spending, you might try using the 50/30/20 rule.

The 50-30-20 rule splits expenses into just three categories. It also offers recommendations on how much money to use for each. With some basic information, you can get on the road to financial well-being.

What Is the 50/30/20 Rule?

The 50/30/20 rule is a budgeting technique that involves dividing your money into three primary categories based on your after-tax income (i.e., your take-home pay): 50% to needs, 30% to wants and 20% to savings and debt payments. The rule was comprehensively covered by then-professor (now senator) Elizabeth Warren and her daughter, Amelia Warren Tyagi, in their book “All Your Worth: The Ultimate Lifetime Money Plan.”

50% — Needs

​​Needs are expenses that are necessary for survival and basic well-being. These include housing, utilities, food, transportation, healthcare and childcare. While these needs may seem clear-cut, there’s still a significant amount of personal interpretation within this category.

Some people can use public transportation, but others may need a personal vehicle.  A single parent may consider their life insurance premium to be an essential cost, while a person with no children may not.

If your budget is tight, consider the options you have to trim your necessary expenses:

• Can you move to a cheaper location or add a roommate?
• Could shopping at a different grocery store save you money?
• Can you find ways to drive less often to reduce your fuel costs?

30% — Wants

Wants are often called nonessentials, but these expenses allow you to personalize your budget. Whether it’s self-care or eating out, including some fun in your budget may make you more likely to stick to it.

While 30% may seem extravagant, the wants category is usually doing some double duty by including any upgrades you may wish to make in your needs section. While you may need a cell phone, getting the newest device or paying for a premium plan may be a want. You definitely need clothes, but you may opt to buy a special outfit or a more expensive brand.

Common “wants” include:

• Gym memberships
• Cable TV or streaming services
• Vacations
• Furniture
• Beauty appointments
• Hobbies
• Eating out
• Entertainment
• Clothes shopping
• Electronics

20% — Savings and Debt Repayment

The 50/30/20 plan prioritizes savings and debt reduction, but the breakdown of savings or debt payments will depend on your personal circumstances.

Savings can include retirement contributions, an emergency fund, or a goal like homeownership or travel. If you are debt-free or your only debt is a low-interest mortgage, you may want to devote the full 20% of your net income to savings.

If you have student loans or are carrying a credit card balance, you’ll need to decide how to split your savings and debt repayments. If you’re paying higher interest on loans than you can earn through savings, it may be wise to devote a larger portion to debt repayment.

Paying down high-interest debt can be an important step toward financial stability. However, be sure not to neglect retirement contributions to tax-advantaged accounts, especially if your employer matches those contributions.

So, how do you actually use the 50/30/20 rule? To put this simple budgeting rule into action, you’ll have to calculate the 50/30/20 ratio based on your income and categorize your spending. Here’s how:

The first step to using the 50/30/20 budgeting rule is to calculate your after-tax income. If you’re a freelancer, your after-tax income will be what you earn in a month, minus your business expenses and the amount you’ve set aside for taxes. 

If you’re an employee with a steady paycheck, this will be easier. Take a look at your payslip to see how much lands in your bank account each month. If your paycheck automatically deducts payments such as health insurance or pension funds, add them back in.

To get a true picture of where your money goes each month, you’ll need to see how and where you’ve spent your income over the past month. Grab a copy of your bank statement for the past 30 days, or simply use the Insights feature in your N26 app. It automatically sorts all your transactions into categories such as Salary, Food & Groceries, Leisure & Entertainment, and more.

Now, split all your expenses into the three categories: needs, wants and savings. Remember, a need is an essential expense that you can’t live without, such as rent. A want is an additional luxury that you could live without, such as dining out. And savings are additional debt repayments, retirement contributions to your pension fund, or money that you’re saving for a rainy day. 

Now that you can see how much of your money goes towards your needs, wants and savings each month, you can start to adjust your budget to match the 50/30/20 rule. The best way to do this is to assess how much you spend on your wants every month.

According to the 50/30/20 rule, a want is not extravagant—it’s a basic nicety that allows you to enjoy life. As cutting back on your needs can be a complex and challenging task, it’s best to work out which of your wants you can cut back on to stay within 30% of your take-home income. The more you reduce spending on your wants, the more likely it is that you’ll be able to hit your 20% savings target.

4. Use our 50/30/20 budget rule breakdown printable

Is the 50/30/20 budget rule right for you?