If you’re looking for a budget that’s:
- Easy to remember;
- Easy to stick to; and
- Doesn’t require you to live a spartan lifestyle,
then the famous 50/30/20 budget might be a perfect fit. After all, it’s helped countless people — especially young folks like us — budget and reach their financial goals since 2006.
Here’s a quick explainer video:
The 50/30/20 budget is slick and simple, but it’s also controversial due to its age. So, is it still relevant in 2022? When does it work? When doesn’t it work?
And all things considered, is it the right budget for you?
Let’s investigate the 50/30/20 budget.
What Is the 50/30/20 Budget?
The 50/30/20 budget is when you take your monthly, post-tax income and dedicate:
- 50% to needs
- 30% to wants
- 20% to savings
The budget was conceived by Senator Elizabeth Warren and her daughter Amelia Warren Tyagi in their book, All Your Worth: The Ultimate Lifetime Money Plan, which they cowrote while Warren was still teaching at Harvard Law.
In the end, the budget really stuck and gained a following due to its simplicity. There are no spreadsheets, pivot tables, or heuristics to memorize — just three simple numbers. As long as you keep those three numbers in mind throughout the month, you’ll budget pretty effectively.
Here’s a breakdown.
50% for Needs
Needs are mandatory expenditures that you simply can’t skip. Things like groceries, rent, childcare — you know, “adulting” stuff.
Here’s a general list of spending categories that fall into the needs bucket:
- Insurance premiums (auto, home, medical, etc.)
- Transportation (gas, bus fare, etc.)
- Wi-Fi and mobile data plans
- Therapy and mental health services
- Gym membership (debatable, since there are free ways to exercise)
30% for Wants
The middle spending category goes to “wants” — things that might make life better, but that you don’t necessarily need to pay for each month.
Things that fall into the wants category include, but certainly aren’t limited to:
- Restaurants and takeout
- Entertainment and media subscriptions (Twitch, Netflix, etc.)
- Concerts and movie tickets
- Online shopping
- Video games and consoles
Get the gist? And yeah, sometimes it can be hard to distinguish between a “want” and a “need.” We’ll talk more about that in a bit.
For now, let’s talk about the last category of the 50/30/20 budget: saving.
20% for Savings
Finally, 20% of your monthly post-tax income should be put into savings. You could stash it in your high-yield savings account (HYSA), your retirement account, or even buy index funds with it.
The unifying theme of the 20% “savings” category is that you’re getting this money out of your checking account and into an account where it can grow. That’s why some folks call the final category “savings and investments.”
Here’s an expanded, but not exhaustive list of places that fall into the savings bucket:
- High-yield savings accounts (HYSAs)
- Retirement accounts (401(k), Roth IRA, etc.)
- Brokerage accounts/investing in the stock market
- I Bonds, which generate interest to match the rate of inflation (around 9% in 2022)
Now that we’ve covered the three spending categories, let’s break down an example.
50/30/20 Budget Example
Let’s say you take home $4,000 a month post-tax. Here’s a very simple breakdown of what a 50/30/20 budget could look like.
$4,000 x 50% = $2,000 for needs
- $1,400 for rent and utilities
- $250 for groceries
- $150 for mental/physical health expenses
- $100 for mobile data and Wi-Fi
- $100 for gas
$4,000 x 30% = $1,200 for wants
- $400 for restaurants and takeout
- $350 for shopping
- $200 for entertainment
- $200 for vacation savings
- $50 for Netflix, Hulu, and Spotify
$4,000 x 20% = $800 for savings
- $400 into retirement (plus employer match)
- $250 into a shorter term investing account (ETFs, index funds, etc.)
- $100 into emergency savings
- $50 into speculative investments (crypto, individual stocks, etc.)
Again, this is just a basic example to illustrate the concept. Rent may be higher than $1,400 in your city, in which case you may need to pull back on wants to make ends meet.
Speaking of you, let’s go ahead and calculate your 50/30/20 budget.
50/30/20 Budget Calculator
In this section we’re going to calculate your own 50/30/20 budget. This’ll be helpful to have on hand as we dive into further detail, like how debt factors in.
Start by calculating your monthly take-home pay after taxes (Uncle Sam’s money shouldn’t ever factor into the 50/30/20 budget).
Next, use MU30’s calculator to determine how much you have available to spend in each category.
Once you have your three numbers, see how your existing spending habits stack up. If you aren’t currently tracking your spending in a budgeting app, log into your bank account dashboard and see if you can pull up a breakdown of your spending categories.
So, how’s it look?
If you’re anything like I was in my 20s, you might notice that you’re overspending on wants and not saving enough. If I recall, my balance was something like 50/45/5. That’s a huge missed opportunity that I was quick to remedy, since every $1 invested at 25 becomes $45 by age 65 (assuming 10% APY).
Or maybe your head is screwed on tighter than mine was, and you’re already saving more than 20%. Awesome.
Either way, knowing is half the battle. Now that we an idea of what your 50/30/20 budget looks like, let’s dive into more detail.
Namely, how does debt factor in?
How Does Debt Factor Into the 50/30/20 Budget?
Now that American household debt has surpassed $16.5 trillion, plenty of people will be wondering how debt fits into a 50/30/20 budget.
Most folks file debt repayment into the 20% savings category, and work to pay off the debt before investing in other places.
We’ve written a whole piece on whether you should pay off debt before investing, but as a general rule of thumb, if your debt’s APR is higher than your investments’ APY, you’ll be better off erasing your debt first.
That being said, there are definitely ways to lower the interest rate on your debt so you can pay it off fast and begin investing sooner. Check out our detailed guides on lowering and erasing your debt, based on type:
- For credit card debt: Should You Do a Balance Transfer to Save on Interest?
- For student loans: How to Manage Student Loan Debt
- For auto loans: How to Refinance Your Car Loan in 7 Steps
- For mortgages: Refinance Your Mortgage Online
Overall, you can probably tell that the 50/30/20 budget isn’t really designed around paying off debt. It kind of assumes you’re debt-free and make enough money to save 20% of your income every month, which isn’t realistic for a lot of people.
So let’s dive into the general pros and cons of using the 50/30/20 budget.
Pros and Cons of the 50/30/20 Budget
- It’s simple. Some budgeting methods call for complex spreadsheets, pivot tables, and more. But a 50/30/20 budget can be established with a pen and a napkin.
- It’s compatible with budgeting apps. Many modern budgeting apps have a 50/30/20 option already baked in, so you’re just taps away from holding yourself accountable with notifications, tracking, and more.
- Saving 20% is aggressive, but extremely effective. Here’s a TL;DR of my article, How the Rich Get Rich (and How You Can, Too!): just save 20% of your income for 30 years and you’re golden. The 50/30/20 budget aligns with that strategy perfectly.
- 50% may not cover your needs. The 50/30/20 budget was conceived in 2006 when the median rent was around $950. Today, it’s $2,000 and the cost of living continues to outpace wage growth.
- It can be hard to distinguish between wants and needs. Is hiring a personal trainer a “want” because it’s unnecessary? Or a “need” because it’s tied to your physical and mental health? 50/30/20 budgeters have to face these questions often.
- It’s not designed for debt structuring. As illustrated above, the 50/30/20 budget just wasn’t designed with debt repayment in mind, forcing folks to awkwardly shoehorn their debt into the 20% saving category.
- It’s not ideal for parents. As any parent knows, the costs associated with childcare are both high and unpredictable. You may find that raising children pushes your needs bucket to 60% or even 70%.
Is the 50/30/20 Budget Right for You?
All things considered, would the 50/30/20 budget be a fit for you and your financial situation?
The 50/30/20 Budget Could Be a Fit If:
You Earn an Average Income
The 50/30/20 budget tends to work best for folks earning the median $45,000 or higher. Any lower and your needs will almost certainly take up more than 50% of your budget.
It’s Your First Budget
The 50/30/20 budget may not be perfect, but it’s way better than nothing. If nothing else, it holds you accountable for saving 20% of your income, which is the single most important step to achieving financial independence.
The 50/30/20 Budget May Not Work for You If:
You’re Paying Off Large Debts
If you’re trying to pay off a large amount of high-interest debt, 20% may not be enough in the short term. You’ll definitely want to consolidate your debt, refinance, and/or lower your interest rates ASAP.
Your Needs Exceed 50% of Your Income
As mentioned, the 50/30/20 budget was conceived when average rent was less than half of what it is today. If you’re already struggling to make ends meet, the 50/30/20 budget may not be a fit.
You’re a High Earner
Conversely, if you earn enough that your needs don’t take up 50% of your income, you can probably be saving at a much higher rate. Maybe a 20/30/50 budget makes more sense!
Your Income Changes Month-to-Month
The 50/30/20 budget works best for W-2 earners with stable income. If you’re a contractor, entrepreneur, or small business owner with less stable income and a random litany of business expenses, you may find it hard to stick with the 50/30/20 budget on a monthly basis.
Read more: How to Budget on a Variable or Irregular Income
Tips for Sticking to the 50/30/20 Budget
Budgeting is like flossing. It’s hard to get started, but once you build the habit, you have it for life (and it pays off).
Here are some tips on setting up and sticking with a 50/30/20 budget:
Set up Auto Deposits
Saving becomes second nature when you automatically pull 20% out of your paycheck each month. It’s also a brilliantly effective tactic to prevent overspending.
Get a Budgeting App
Sticking to the 50/30/20 budget becomes much easier when you download an app to track your spending and call you out when you order too many appetizers. Plus, many of today’s best budgeting apps have a 50/30/20 budget preset.
Recalculate Your Budget When Your Income Increases
As soon as you get a raise, recalculate your 50/30/20 budget using the calculator above. It’s honestly pretty satisfying to see all three categories rise in tandem.
Don’t Feel Guilty for Spending on “Wants”
Before I had a budget, I felt a little guilty each time I bought a “want.” But the 50/30/20 budget helps you establish a “guilt-free” 30% fund so you can truly enjoy buying things that make you happy.
Celebrate Your Savings Milestones
Finally, celebrating milestones like reaching your first $10,000 in savings can be an incredibly powerful motivator, giving you plenty of steam to save your next $10,000.
Perhaps the biggest drawback to the 50/30/20 budget is that it hasn’t adjusted to the skyrocketing cost of living — especially for young people. You may find that you need to save money on some of your needs and wants to make the budget work.
- 5 Steps to Create a Budget that Actually Works
- The Best Way to Budget? Try Pen and Paper