WTFinance is the 50/30/20 rule?
One way to keep spending in check is to limit how much you shell out for each type of expense. Sounds simple enough, right? But costs can change—and so does income. When you’re doing well financially, it’s okay to give yourself some breathing room. When money is tight, it’s a good idea to reel it in. Here’s a strategy you can use to figure out how to portion out the money you do have.
You can break down a budget using the 50/30/20 rule. This rule of thumb focuses on major buckets of spending. Let’s take a closer look at how to use the 50/30/20 rule to budget.
What is the 50/30/20 rule?
The 50/30/20 rule received attention when Senator Elizabeth Warren included it in her book, All Your Worth: The Ultimate Lifetime Money Plan. Basically, the idea is to divide your spending into the following categories:
Needs: 50% of your income should cover necessities.
Wants: 30% of your income can be used for things you want, but don’t need.
Savings: 20% of your income should be aimed at saving for the future, including retirement and paying down debt.
Let’s break it down a little bit further and dig into what type of spending falls into each category.
Needs: 50% of your income
Your needs are the things required for survival, as well as the bills you must pay. When figuring out your needs, it’s important to be brutally honest about what’s absolutely necessary spending.
These “must haves” include such expenses as:
Housing (mortgage or rent payment)
Insurance
Car payments (or other transportation costs so you can get to work and earn money)
Groceries
Utility bills
Healthcare
Basic clothing
Minimum payments on debt obligations
Add up the cost of these items in your budget. If they amount to more than 50% of your after-tax income, that might be a warning that your budget is strained.
If your “needs” category is high, make sure you’re not padding it with wants. Internet service can be considered a necessary utility, but not streaming packages. The same goes for regular purchases of expensive designer duds.
It also gets tricky when needs quietly morph into wants. For example, you need to buy new school clothes for your kids , but you might not need to buy each of them a whole new wardrobe complete with new shoes, accessories, and 15 outfits. Maybe you can focus on just the necessities and the items they really do need.
Be realistic about how you’re spending and make sure this category only includes truly “must haves.”
Wants: 30% of your income
Next, take a look at your wants—things that you don’t need for survival or to meet obligations, but which help you live your life the way you want. Some expenses that usually fall into the wants category include:
Eating out or buying treat items at the store
Going to the theater
Vacations
Events
Electronics
Streaming services
When choosing how to spend your money or looking for ways to reduce spending, this is the category you want to focus on. If you need to bring your numbers down, get rid of some of the non-essential spending.
Savings: 20% of your income
Making sure you set aside 20% of your income to build your future is an important part of the 50/30/20 rule.
Savings can take many forms:
An emergency fund in a high-yield savings account
Your retirement account
A taxable investment account
You can also include additional debt payments in the savings category. For example, if you’re trying to pay down a credit card balance, your minimum payment is part of your needs. But the extra money you add to the balance on top of the minimum can go in the savings column.
Using the 50/30/20 rule can help you take control of your money and give yourself the freedom to spend money on the things that matter most to you.
