The 50/30/20 Rule: A Simple Budget Framework

The 50/30/20 rule is one of the most popular budgeting frameworks because it's simple to understand and flexible enough for most situations.

How It Works

Divide your after-tax income (net income) into three categories:

50% — Needs

These are expenses you can't avoid:

• Rent or mortgage
• Utilities
• Groceries (not dining out)
• Insurance
• Minimum payments on debt
• Transportation to work

30% — Wants

Things that improve your life but aren't essential:

• Dining out
• Entertainment (streaming, concerts)
• Hobbies
• Shopping beyond necessities
• Vacations

20% — Savings & Debt Payoff

Building your future:

• Emergency fund
• Retirement contributions (401k, IRA)
• Extra debt payments beyond minimums
• Other investing

Real Example

Let's say you earn $4,000/month after taxes:

• Needs (50%): $2,000 (rent, utilities, groceries, insurance)
• Wants (30%): $1,200 (dining out, entertainment, subscriptions)
• Savings (20%): $800 (401k, emergency fund, extra debt payoff)

When to Adjust

This rule is a starting point, not a strict requirement. You might need to adjust if:

Needs are higher than 50%:

• You live in a high cost-of-living area
• You have significant medical expenses
• You're supporting family members

Try to get needs as low as possible over time, but don't stress if you're at 55-60%.

You want to save more:

• Aiming for early retirement
• Paying off debt aggressively
• Building wealth faster

Many financially independent people follow a 50/30/20 split where the 20 is actually 30-50%.

The Key Insight

The exact percentages matter less than having a system. The 50/30/20 rule gives you:

1. Permission to spend — That 30% for wants is guilt-free
2. Automatic saving — 20% is built into the plan
3. A reality check — If needs exceed 50%, something needs to change

The best budget is one you'll actually follow.