A Guide To The 50/30/20 Rule

The 50/30/20 rule divides your income into three categories: 50% for needs, 30% for wants and 20% for debt repayment and savings. The rule is a solid starting point for a monthly budget, and you can tweak the percentages to fit your evolving financial situation. Follow along to find out how to use the rule to your advantage.

What Is The 50/30/20 Rule?

The 50/30/20 rule is a simple budgeting method used to break down your after-tax income into three spending categories: needs, wants and savings. This type of budgeting is a simpler alternative for those who are unlikely to track every bill or purchase, instead providing a rule of thumb for the percentage you should devote to each category.

How The 50/30/20 Rule Works

It’s important to remember that the 50/30/20 budget “rule” is more of a guideline than an absolute rule and will vary according to your needs. Here’s how it might work in practice.

50% For Needs

• Rent or mortgage payments: You will find multiple suggestions for how much of your income should be spent on your housing, but a good rule of thumb is to spend no more than 30% of your pretax income.
• Health care costs: A Kaiser Family Foundation annual survey found that the average annual health insurance premium in 2023 is $8,435 for single coverage and $23,968 for family coverage.
• Car payments: according to research from Edmunds, the monthly payment for new cars averaged $733 in Q2 2023 while used car monthly payments stood at $569.
• Credit card minimum payments and student loans: Keeping up with your credit card and student loan payments is essential for maintaining your credit score.
• Groceries: According to the U.S. Department of Agriculture’s Cost of Food Report, an individual aged 20-50 can spend anywhere from $241.40 to $451.80 per month on groceries.

30% For Wants

This category includes any discretionary spending.

• Hobbies: Costs for hobbies vary widely depending on what you like to do. If you’re into knitting, that’s going to be less expensive than buying video games, which are less expensive than equipment for a hobby like golf.
• Entertainment: While each streaming service subscription may seem like a small amount, having multiple can add up over time. Make sure to keep track of your entertainment budget before it balloons.
• Gym memberships: A survey of the major gym chains in 2022 found that the average gym membership costs just over $50 per month.
• Vacations: Vacations also vary widely from person to person, depending on where you want to go and how long you plan on vacationing for. Whatever you plan to spend in a year, divide that number by 12 to include it in your monthly budget.
• Dining out: Dining out even just a few times a month can add up, especially for a family. That said, we know it’s something many people enjoy doing, so make sure to include it as part of this bucket.

20% For Savings And Other Debts

The last 20% of your budget can be set aside for things like retirement plans and an emergency fund. It’s recommended that you eventually work your way up to 3 – 6 months of emergency funds. That said, it’s usually easier to start with a smaller initial goal of $100, then $1,000, and work your way up.

You can also take this portion of your budget and use it toward paying off debts faster.

50/30/20 Rule Example

If you make the U.S. median income of $74,755, here is how you can organize it using the 50/30/20 rule. First, let’s assume you live in the state of Maryland where you would pay $5,336 in state income taxes and $11,753 in federal income taxes per year. Then you can start planning your after-tax budget. Please note the numbers below are for demonstration purposes only, may be rounded for simplicity and may not directly apply to your financial situation.

Starting Point: $57,666 per year, $4,805.50 per month

~50% For Needs (per month):

• Housing and utilities: ~$1,500
• Health care premium: $100 (assuming your job pays for a majority of your premium)
• Car payment: $300
• Groceries: $250
• Credit card minimum payment: $500

~30% for Wants

• Hobbies: $200
• Entertainment: $250
• Gym: $55
• Vacations: $400
• Dining out: $300

~20% for Savings and Debt

• Retirement: $300
• Debt: $200
• Emergency savings: $200
• Investments: $250

How To Make The 50/30/20 Rule Fit Your Situation And Goals

As we mentioned previously, you do not have to adhere perfectly to the 50/30/20 rule. Everyone has different financial goals that require varied spending habits. If you’re living on a low income, it might seem impossible to only allocate half of it to your basic living expenses. If your income is quite high, your needs might not consume half of it and spending 30% on wants could be wasteful. You also may have specific financial goals, such as saving for a down payment on a home, that force you to deviate from the 50/30/20 rule. The key is to give yourself the flexibility to adjust the rule to your specific needs.

Setting Your Finances Up For The 50/30/20 Rule

There are several simple techniques you can use to automate your finances to abide by the 50/30/20 rule. For example, use direct deposits into checking accounts for your wants and needs every month, then direct deposits into retirement accounts such as IRAs for your monthly savings. There are also budgeting apps like Rocket Money^SM that can help you organize your finances.

50/30/20 Rule Alternatives

The 70/20/10 Rule is one of the most prevalent alternatives. This suggests you use 70% of your post-tax income on wants and needs, 20% on savings and investment, and 10% on debt repayment. This is a good alternative for anyone who wants an even more general guideline, as the combination of wants and needs into one large category of your budget allows for ultimate flexibility.

50/30/20 Rule FAQs

Is the 50/30/20 rule realistic?

As with any guideline, it’s not going to fit every situation. People have used the 50/30/20 rule as a realistic guideline for planning their finances for over a decade. However, whether the rule is realistic for your personal finances is ultimately up to you.

Does the 50/30/20 rule still work?

Yes! The 50/30/20 rule is still a relevant plan for your budget. With clear guidelines combined with the flexibility to customize your finances, it is still a fantastic budgeting rule to use as a starting point for your budget.

Do I include taxes when calculating the 50/30/20 rule?

The 50/30/20 rule is based on your after-tax income. So you don’t have to budget for the taxes you need to pay because they will already be taken out of your budget when you make your 50/30/20 budget.

Can I adjust the percentages of the 50/30/20 rule to fit my financial situation?

Yes! As we mentioned previously, the 50/30/20 rule does not have to be a strict rule. You can use it as a guideline to create a budget that works for you and your family.

The Bottom Line: Use A Budgeting Rule For Financial Planning

The 50/30/20 budget is a general rule to guide your budgeting strategy. The basic idea is that 50% of your income goes toward paying for things you need, while 30% is reserved for things you want and 20% goes toward savings or extra payments on debt. While it’s not a one-size-fits-all approach, it can be helpful when figuring out how to structure your budget.

Want some extra help staying on top of your expenses? Automating your finances is a great way to set money aside for needs, wants and savings. Download the Rocket Money℠ app to simplify managing your budget.