Understanding the 50/20/30 budget rule

The 50 30 20 rule is a budgeting plan that recommends allocating 50% of your net income (your after-tax, take-home pay) on basic needs, leaving 30% to spend on nonessentials and 20% for savings. This budget doesn’t work perfectly for everyone, but it’s a great rule of thumb for anyone who’s new to budgeting. 

If you think the 50 30 20 rule might work for you, start by making a simple personal budget. 

1. Determine your monthly net income. Your net income is different from your gross income—put simply, it’s your gross income after taxes have been taken out. If you’re a salaried employee who receives a regular paycheck, this information should be easy to find on your paystubs. If you have an irregular or freelance income, you can use last month’s income, last year’s income, or an average of several months’ income. If you’re self-employed, take out 25–30% of your gross income for income and self-employment taxes.

2. Calculate how much to spend on each category. Now that you know your monthly net income, use that number to calculate how much money you should spend in each of the three budget categories. Multiply your net income by 0.5 to find out how much you can spend on essentials, by 0.3 for nonessentials, and by 0.2 for savings.

Track your spending. Look at your bank and credit card statements from last month to see how your spending compares to the 50/30/20 rule. Categorize each of your expenses, and then add up the totals to see if you need to adjust your spending to meet your financial goals.

Sorting all of your expenses into just three categories can be difficult, so let’s break down what should go into each.

• The 50: Essentials or “needs.” Under the 50/30/20 rule, 50% of your after-tax income should go towards essential living expenses such as rent, car payments or public transportation, groceries, health care, utilities, and minimum payments on debts. Some essentials are fixed expenses, while others change from month to month. One way to determine whether an expense is essential is to ask yourself, “What would happen if I didn’t pay for this?” or “Can I live without this?”

• The 30: Nonessentials or “wants.” The 50/30/20 rule allocates 30% of your net income for nonessential products and services. This broad category includes entertainment, travel, eating out, shopping, gifts, fitness classes, and other things you can live without. Anything that doesn’t fall under the “essentials” category goes here. The expenses in this category might be important to you, but they are choices, or wants, rather than basic living requirements.

• The 20: Savings. Last but not least, make sure you’re putting 20% of your income into savings accounts and paying off debt, such as student loans and credit card debt. Not sure where to put this money? Experts recommend saving 10% of your net income for retirement. Use the remaining 10% for extra payments on debts and saving goals, such as your emergency fund.

The beauty of the 50/30/20 rule is its simplicity. The 50/30/20 budget might be a great choice if:

• You want to keep things simple. With only three categories, the 50/30/20 budget really streamlines your personal finances, giving you a big-picture overview of your spending. This is great for anyone who is new to budgeting, or feels overwhelmed by more detailed budgets. 

• You don’t have a lot of debt to pay off. While putting aside 20% of your net monthly income for savings and debt payoff might seem like a lot, it might not be enough if you have a lot of debt to pay off. The 50/30/20 budget rule works best if your debts are low compared to your income, and you already have an emergency fund set up.

The goals of the 50/30/20 rule are to find financial balance and save money for the future—but it doesn't work for everyone. You can adjust the percentages to make a budget tailored for your unique financial situation. Here’s what to do if:

• Your essential living expenses total more than 50 percent. Your essential living expenses account for more than 50 percent of your budget if you live in an expensive city or live alone. If you’re a freelancer, you may be pay a lot for your own health care. If you are spending much more than 50% of your income on essentials, the easiest place to cut back is rent. If you’re living alone, consider moving in with roommates. Shared living options like Bungalow are more affordable than living alone. 

• You want to pay off debt. If you have credit card or loan debt that you need to pay off ASAP, 20% of your income might not be enough for the savings category. Try a 70/20/10 plan, with 20% of your income going towards paying off debt, 10% towards retirement savings, and 70% for everything else.

• You have high income. Because its based on static percentages, this budget rule assumes that all of your expenses will scale equally as your income grows—which could lead to overspending. Instead, as your income grows, the percent you’re able to save every month should grow too. 

Bungalow offers private rooms in shared homes that are more affordable than solo housing options in the same neighborhoods. Wifi, utilities, and monthly cleaning are set up before you move in so that communal living is seamless. Find a Bungalow near you.