What is the 50/30/20 Budget Rule? How Does It Work?

Written by Kim PinnelliReviewed by Nathan Brown, CFP®Updated: 20th Aug 2022
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Are you tired of worrying about money? Do you wonder at the end of each month where your money went?

It’s exhausting. Money stress can cause so many physical and mental ailments – it’s just not worth it.

You need a budget, and not just any budget – one that you can stick to. If you’re tired of restrictive budgets that take too much time and are easy to give up, check out the 50/30/20 budget created by Senator Elizabeth Warren.

How Does the 50/30/20 Budget Rule Work?

If a simple budgeting program is what you’re after, look no further than the 50/30/20 budget. It’s simple to implement, understand, and it’s forgiving.

You don’t have to worry about envelopes, budgeting each individual category, or feeling like you have to stand on your head just to understand your budget!

Here’s the simple version. You break up your income like this – 50 percent for essential spending, 30 percent for non-essential spending, and 20 percent for financial goals (aka debt pay off and savings).>> More: How to Budget Money

A Look at Each Budgeting Allocation

Here is the gist of it:

  • Your essential spending includes the bills you MUST pay. If you do not pay them, you will face the consequences. Essential expenses include:
    • Housing Rent
    • Utilities
    • Car
    • Phone Bills
    • Groceries
    • Health and car insurance
  • Your non-essential spending or as I like to call them, your ‘wants,’ is money you spend regularly, but you could live without if you absolutely had to, such as:
    • Unlimited data cell phone plans
    • Cable
    • Unnecessary home or car improvements
    • Dining out
    • Shopping (non-essential clothes, electronics, etc.)
    • Any other little extras you love to spend
  • Your financial goals encompass a large number of instances. This is the money you have available for future goals, whether it is getting out of debt or saving.
    • Pay off credit cards
    • Set up an emergency fund
    • Save for retirement in your IRA or 401K
    • Invest in the stock market

Keep in mind, minimum credit card payments fall under the ‘essential spending.’ You must make your minimum payments – that is required.Anything ‘extra’ falls under the financial goals and is an area I strongly encourage you not to ignore.

Saving for the future is essential – even if you are in your 20s now, retirement will be here before you know it. Remember, you want to enjoy a financially secure retirement.

The 50/30/20 Budget Rule in Action

Let’s look at a real-life example.

Joe brings home $5,000 a month.

He splits that up in the three categories, so $2,500 for essentials, $1,500 for non-essentials, and $1,000 for financial goals.

Spend 50% on Essentials (“Needs”)

Joe must figure out how to split his $2,500 up effectively for his needs. First, he should consider his housing expense as that is usually the largest monthly expense. His rent or mortgage must fit into that amount along with his utilities, car payment, groceries, and phone bill.

Joe uses this as his guide and finds a lease for $1,200, leaving him with plenty of room for his other essential expenses. Joe does not feel like he has to sacrifice but has a place he likes too.

If Joe is already in an expensive lease, then his best bet would be to make do for now.He can sacrifice in other areas, like getting a lower phone plan or getting a less expensive car to eliminate car payments. Once his lease is up, he could find a lease that fits into his budget, allowing for fewer sacrifices.

Spend 30% on Non-Essentials (“Wants”)

Now the fun part! Joe has $1,500 for non-essentials. He could do a few things here. If Joe is finding that he has to sacrifice his needs – then he may treat himself in other categories.Maybe he wants to shop at Whole Foods rather than Aldi.

Or maybe Joe wants that unlimited data plan. Whatever it is, he can play with the $1,500, sharing it amongst the ‘needs’ while splurging on them slightly.

Joe finds balance with his wants – curbing his shopping habit and not dining out as often as he used to so he can fit other desires in there without using his credit cards.

He sees how purchasing items on credit will only make his ‘needs’ expense increase. And he doesn’t want to give up his fantastic apartment that he’s leasing right now so Joe sticks with what he can buy in cash.

Put 20% Towards Your Savings and Other Financial Goals

Now, there is the last $1,000. Joe has a few credit cards, so he should pay those off. He makes the minimum payments with his essential spending, but he uses $1,000 each month to pay them down. Joe likes the debt avalanche method.He pays $500 of his available $1,000 to the credit card with the lowest debt. Once he pays that card off, he will move to the next card, paying the extra $500 each month.

Joe uses the remaining $500 to stash away for his emergency fund – he has about 6 months of expenses saved. Once he does, he will stash that $500 away in his Roth IRA to set himself up for the future.

Is the 50/30/20 budgeting rule good for you?

If you hate categories and watching every penny in each, you will love the 50/30/20 rule. You have freedom but within reason. You stay on track with your spending and immediately recognize when you have overspent.

It is flexible and forgiving. Sure, it stinks to go over your budget, but it just means you make better choices next month or you change certain habits.For example, if your phone bill keeps putting you over budget, think about scaling back so you can stay within your allotted expenses.

It is freeing to know you can spend 30 percent of your hard-earned money on things you want. To me, it is empowering and lets me spend without guilt.

However, if you need more structure, then you may want to look at the other options. Keep reading to find another budgeting option or partner with a budgeting app.

Why is budgeting important?

Do you drive a car without knowing where you are going? Let’s say you’re going on a trip. Do you get in the car and just drive – hoping that you will make it to your destination?

You don’t – you have a plan and use a map. It is the same thing for budgeting. Your money needs a map. It needs someone to tell it where to go and what you can do. Without a budget, you never know how much money is free.This leads to overspending, not saving, and overall financial destruction.

Even rich people need a budget – everyone has to tell their money what to do if they want to stay out of debt and enjoy their life.

Set Financial Goals

A big part of the 50/30/20 budget is goal setting. This is why I love it so much. You set aside 20 percent of your income each month for financial goals.

Whether it means getting out of debt or saving for the future, they both help you financially.Ideally, you should get out of debt and save for the future, but one step at a time.

If you do not have debt and your emergency fund is stocked, there are many other areas you can save:

  • IRA
  • 401K
  • 529 college savings plan
  • Taxable investment accounts
  • CDs
  • Online high yield savings

Alternatives to the 50/30/20 Budget:

While the 50/30/20 budgeting rule is easy to follow and implement, it isn’t for everyone. Here are two other alternatives that are worth considering.

Envelope budget

If you are detail-oriented and need to see each category, you will love the envelope method.You create an envelope (physical or digital) for each of your categories. You can combine expenses, such as housing (utilities, phone, rent, etc.) into one envelope or have multiple envelopes. Create envelopes for all spending categories (shopping, groceries, car payment, savings, debt, etc.).

Split your income up according to your spending in each category. This may require some tweaks if you find you have budgeted more than you make, so give yourself some wiggle room. Then track your spending.

Once you spend all the money in one category, you are done for the month unless you borrow from another category. It keeps your spending in check but requires attention to detail.

Zero-Based Budget

This budget requires good attention to detail but in a different way. You give every dollar you bring in a ‘job.’ Your checking account should have a zero balance at the end of each month.

This does not mean you are broke – it just means you allocated each dollar.

Categories include:

  • Housing
  • Car expenses
  • Food
  • Household goods
  • Clothing
  • Credit card bills
  • Taxes
  • Insurance
  • Savings
  • Retirement

If you do it right, you should have no money left. This budgeting method eventually helps you live off past money.Instead of hoping you have enough money coming in, you KNOW that you have enough because it is already there.

Bottom Line: The 50/30/20 Budget Rule

Should you try the 50/30/20 budget? If you are not super-detailed and want freedom with your spending, then this easy-to-use budget is the perfect option.

If you need more structure, then consider another budgeting option. The key is that you have a budget that you stick to.

Just saying you have a budget does you no good – you need one that’s easy for you to use and stick to and if it’s the 50/30/20 budget – then you’ve found yourself a great program!

Kim Pinnelli
Kim Pinnelli

Kim Pinnelli is a Senior Writer, Editor, & Product Analyst with a Bachelor’s Degree in Finance from the University of Illinois at Chicago. She has been a professional financial writer for over 15 years, and has appeared in a myriad of industry leading financial media outlets. Leveraging her personal experience, Kim is committed to helping people take charge of their personal finances and make simple financial decisions.