So you were looking into budgeting methods and came across the 50/30/20 rule. At first, it seemed like a simple and easy way to manage your money, but you still have doubts about how realistic it is. Did we get that right?
The 50/30/20 budget rule suggests splitting your income into needs, wants, and savings. It's an intuitive and straightforward method that can make budgeting easier for those who aren't used to it. But depending on your income and the cost of living in your area, there are a few things to consider before deciding if this approach is right for you.
We talked to finance experts to better understand the pros and cons of the 50/30/20 rule and how realistic this method might be for you.
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What is the 50/30/20 rule?
The 50/30/20 budgeting rule states that 50% of your monthly after-tax income should go to needs, 30% to wants, and 20% for savings. Here's what each category includes:
50: Needs
Your needs are the bills you absolutely have to pay and the essentials for your survival. This includes utility bills, rent or mortgage payments, groceries, transportation, and healthcare. If you can look at an expense and honestly say you can't live without it, it's a need.
30: Wants
Wants are things you enjoy but don't really need. This includes streaming subscriptions, eating out, shopping for clothes, accessories, or games, a premium gym membership, and tickets for concerts or sports events. Basically, anything you can cut from your monthly budget without risking your life or livelihood is a want.
20: Savings
Savings is exactly what it sounds like: Putting money aside for the future. Use this portion of your salary to build an emergency fund or add to your retirement savings account, like an IRA or 401(k). You can also create savings accounts for long-term goals like a house downpayment, a new car, or traveling abroad.
You could use this portion to cover debt repayment as well. If you have student loans or credit card debt, allocate half of this 20% of your income to savings and the other half to fulfill those obligations.
(Minimum debt payments could be considered part of the “needs” category—there's actually no right or wrong here, just choose what works best for you based on your income, needs, and financial goals.)
Does the 50/30/20 rule work?
Generally speaking, yes, the 50/30/20 rule of budgeting works. However, it's not a one-size-fits-all solution.
“Flexibility and personalization are essential to effective budgeting,” says finance and tax expert Dana Ronald, President of Tax Crisis Institute. “While it is a great starting point, individuals with varying financial obligations and goals may need to adjust the percentages to suit their circumstances better.”
The 50/30/20 is ideal for people who live below their means. “If you earn a middle-class income but live a lower-class lifestyle, or if you earn an upper-class income and live a middle-class lifestyle, it may work,” says finance expert Melanie Musson from InsuranceProviders.
Otherwise, your basic needs might take more than 50% of your income, or your lifestyle might cause your wants to consume more than 30%. In short, it would be harder to stick to the 50/30/20 percentages.
Is the 50/30/20 rule realistic?
The 50/30/20 budget rule might not be realistic for those dealing with economic challenges——which, let's face it, is pretty common in today's climate of high inflation and living costs.
“It’s unrealistic for most people,” Musson says. “It might have made sense to save 20% of your income when housing took up half the percentage of a budget that it does today. Now, both rent and mortgage payments demand so much more from each paycheck.”
But if you can manage to cover your essential needs with just half of your income, sticking to the 50/30/20 rule becomes feasible for you. “It is a pragmatic approach to budgeting that offers a structured yet flexible framework, accommodating essential needs, discretionary spending, and prioritizing savings,” Ronald says. “This balance can benefit those who find traditional budgeting methods too restrictive.”
What are the pros and cons of the 50/30/20 method of budgeting?
Like any other budgeting method, the 50/30/20 rule has its pros and cons. Consider these before deciding to give it a try:
Pros
- It's easy to understand and stick to. The percentages make it clear how much money should go into each category without needing complicated calculations.
- It's flexible. The ideal split is 50/30/20, but you can adjust the percentages to fit your current financial situation. For example, if you have debt to pay off, you might need to cut down your wants to prioritize debt repayment.
- It promotes mindful saving and spending. You can set aside a portion of your income for savings without having to say goodbye to all the fun. “This is pivotal for long-term financial health,” Ronald says.
Cons
- It doesn't account for other financial plans. Since your money has three specific destinations, it can be tough to decide what to do when you have goals that aren't covered by the rule—like investments.
- It doesn't meet everyone's needs. “The 50/30/20 might not cater to individuals with high debt or those living in areas with a high cost of living where essential expenses exceed 50% of their income,” Ronald says.
- It disregards people with irregular income. The 50/30/20 rule also doesn't account for people with variable income, like freelancers or the self-employed, who may struggle to stick to it every month.
50/30/20 rule examples
If you're still on the fence about this method and wondering, “What is a 50/30/20 budget example?” so you can better visualize how it works in practice, here are two different scenarios following this rule:
Example #1
Imagine Anne, a software engineer at a tech company, who makes $5,000/month after taxes. She aims to cut expenses and improve her financial health without giving up on things she enjoys, like working out at a local gym and hanging out with friends weekly.
Anne downloads a budgeting app to track her expenses as needs, wants, and savings. Last month, she spent $2,350 on rent, utilities, groceries, transportation, health insurance, and student loan payments. She decides to round up for variable expenses like groceries and utilities, and allocates 50% of her income—which is $2,500—to needs.
Then, Anne set aside $1,500 for her wants and $1,000 for an emergency fund and retirement savings (which are 30% and 20% of her income, respectively). To avoid the temptation of spending this money, she automates transfers from her checking account to these savings accounts.
Example #2
John is a marketing analyst trying to save for a house downpayment, but money management isn't exactly his forte. After searching for budgeting tips online, he settles on the 50/30/20 rule for its simplicity and easy-to-follow approach. When he sits down to work out the numbers, John calculates his after-tax income, which amounts to $3,700/month.
Next, he categorizes his expenses as needs and wants. John realizes his discretionary spending is eating up to 50% of his salary, while his essential needs total around $1,850. To achieve his goal of buying a house, he decides to make a few lifestyle changes.
First, he allocates $1,850 for rent, utilities, groceries, health insurance, gas, and car maintenance. John then cancels subscriptions to two rarely used streaming services and reduces his weekly takeouts to dining out twice a month. This cuts his discretionary spending to the recommended 30% of his salary, totaling $1,100. The remaining amount, designated to savings or debt (though he has none), goes directly into his savings account.
Four weeks later, John lands a new job as a content marketing coordinator, boosting his after-tax income by $1,300. He decides to keep living below his means, allocating half of the additional money towards his home down payment and sending the other half to his 401(k). The rest of his $3,700 new salary continues to be split according to the 50/30/20 rule, just as before.
When might the 50/30/20 rule not be the best saving strategy to use?
“The 50/30/20 rule may fall short for those with substantial debt repayments or significant financial strain,” Ronald says. “Prioritizing high-interest debt and creating an emergency fund should take precedence before allocating funds to discretionary spending.”
One way to tackle this is by using the 50/30/20 structure, but with different percentages. For instance, if your basic expenses and debts take up 65% of your income, you could try a 70/20/10 split until you've cleared your debts and built up an emergency fund. As your finances improve, you can slowly adjust the percentages back to the usual 50/30/20 breakdown.
“The 50/30/20 rule is a great goal,” Musson says. “Even if you can’t attain this budgeting system, try to get as close to it as you can. Your needs are what they are—besides making a drastic lifestyle change, there’s not much you can do about them. With the remainder, balance your wants and savings. If you save everything, you may have a boring life; if you spend everything, you may have a stressful life. Balance is essential.“
Bottom line
At the end of the day, there's no one-size-fits-all solution when it comes to managing money, and the 50/30/20 budget rule is no exception. Everyone's financial situation, goals, and basic needs are different. The key is to keep developing financial knowledge and strike a balance that lets you treat yourself occasionally while still being responsible.