Britannica Money (2024)

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The 50-30-20 rule is a simple guideline for building a budget.

The 50-30-20 rule is a common way to allocate the spending categories in your personal or household budget. The rule targets 50% of your after-tax income toward necessities, 30% toward things you don’t need—but make life a little nicer—and the final 20% toward paying down debt and/or adding to your savings.

The 50-30-20 rule isn’t meant to be a budgetary precision law, but rather a general guideline to help get you thinking about how to allocate those paychecks.

Key Points

The 50-30-20 rule is a simple guideline (not a hard-and-fast rule) for building a budget.
The plan allocates 50% of your income to necessities, 30% toward entertainment and “fun,” and 20% toward savings and debt reduction.
It’s more important to understand your personal budget realities than to hit the 50-30-20 rule with precision.

Building a 50-30-20 budget

Making a monthly budget is the first step in directing your income toward your short-, medium-, and long-term goals, and the 50-30-20 rule is the first step in making a budget.

Start with your monthly post-tax income, based on recent paychecks. That’s the pie you’ll be slicing up for your 50-30-20 budget.

Mandatory expenses: The 50%

Once you know your income, look at your bills: rent or mortgage, car payments, gas, electric, and phone bills. Then estimate how much you spend each month on groceries. These are your bare necessities. Add it all up, and if it’s half of your take-home pay or less, then you’re already on track for a 50-30-20 budget.

If it’s more than half of your income, ask yourself where you could cut back. Do you need that car for your job, or is it just for weekend cruising? How much are you paying to park it? Are you budget-conscious when grocery shopping? And some of those beverages you consume should probably be in the next category.

Creature comforts: The 30%

Assuming your necessities take up half of your post-tax income, then it’s time to look at how you spend the rest. Bank and credit card statements can help you see what you’re spending on entertainment (including cable and streaming services), eating out, travel, shopping, and self-care. Look back over several months to get a sense of how much you’re spending on average and how it compares with your income. If it’s more than 30%, go through the list to see which of these enjoyments you’ll miss the least, and then make some cuts for the months to come.

Paying down debt and building wealth: The 20%

The last 20%—debt repayment and savings—requires some discipline. It’s tempting, particularly if you’re just starting out, to push off saving and limit debt payments to the required minimum each month. But consider: Credit cards and student debt typically have high interest rates. High-interest debt can be a massive impediment toward meeting your financial goals.

If your debt is manageable, and that 20% is earmarked for savings, think about what you’re saving for. Many experts recommend having six months of expenses saved in an easily accessible emergency fund, usually a savings account. But if you’re saving for longer-term goals like retirement, you may want to consider an individual retirement account (IRA). If your employer offers a 401(k) plan, contribute as much as you can, particularly if they match a portion of your contributions.

A 50-30-20 rule example

After taxes, Ben makes $4,000 a month. If he maintains a 50-30-20 budget, then his monthly expenses might look something like this:

**50% NECESSITIES**
TOTAL = $2,000, or 50%
Mortgage	$1,000
Car payments/insurance/fuel	$225
Gas bill	$150
Electric bill	$100
Phone and Internet bill	$75
Groceries	$450

**30% PERSONAL ENJOYMENT**
TOTAL = $1,200, or 30%
Cable TV and streaming	$150
Shopping	$350
Movies and sporting events	$200
Eating out	$500

**20% SAVINGS**
TOTAL = $800, or 20%
Emergency fund	$600
Roth IRA	$200

The bottom line

When you’re just starting out, it might be impossible to hit those numbers in the short term. For example, a modest apartment in a big city can easily consume 50% of an entry-level salary. And down the road, life changes—such as the birth of a child or a career change—might interrupt your 50-30-20 targeting.

It’s a yardstick, not a hard-and-fast mandate. If you suffer a setback, just make it a point to return to 50-30-20 as soon as you can.

By the same token, when the budget is flush, feel free to raise the savings rate above 20%. Someday, your future self will thank you.

The 50-30-20 rule is a strategy for planning your budget around the things you need, some things you want, and financial goals for the future.

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As an enthusiast deeply immersed in personal finance and budgeting strategies, let's delve into the intricacies of the 50-30-20 rule, a fundamental guideline for building an effective budget. This rule, though not a rigid law, serves as a valuable tool for individuals aiming to manage their finances wisely. To establish my credibility, I draw upon a wealth of knowledge acquired through extensive research, real-world application, and a keen interest in financial management.

The 50-30-20 rule proposes a straightforward allocation of one's after-tax income into three distinct categories: 50% for necessities, 30% for discretionary spending, and the remaining 20% for savings and debt reduction. This principle isn't about stringent precision but rather offers a broad framework to encourage thoughtful allocation of earnings.

Let's break down the key concepts integral to understanding and implementing the 50-30-20 rule:

Allocation Breakdown:
- 50% for Necessities: This encompasses vital expenditures like rent or mortgage, car payments, utilities (gas, electric), and groceries. Ensuring these necessities stay within or below half of your take-home pay is crucial for adhering to the 50-30-20 budget.
- 30% for Personal Enjoyment: After covering necessities, the next 30% is earmarked for discretionary spending on entertainment, dining out, travel, shopping, and other creature comforts. Analyzing bank and credit card statements aids in evaluating and adjusting this category.
- 20% for Savings and Debt Repayment: The final segment involves disciplined allocation towards both debt reduction and savings. This includes addressing high-interest debts and establishing a robust savings plan, considering short-term emergency funds and long-term goals like retirement.
Budget Building Process:
- Assessment of Income: The foundation of the 50-30-20 budget is rooted in understanding your post-tax income, derived from recent paychecks. This income serves as the pool from which you'll allocate funds.
- Mandatory Expenses: Evaluate fixed expenses such as rent, utilities, and groceries to ensure they align with the 50% allocation. Adjustments may be necessary to meet this target.
- Discretionary Spending: Scrutinize past spending patterns through bank and credit card statements to ascertain your average outlay on personal enjoyment. If this exceeds 30%, consider making cuts in non-essential areas.
- Savings and Debt Repayment: The final 20% requires discipline and strategic planning. Recognize the significance of addressing high-interest debt and consider long-term savings vehicles like IRAs or employer-sponsored 401(k) plans.
Flexibility and Adaptability:
- Life Changes and Setbacks: Acknowledge that life circ*mstances, such as career shifts or family changes, may impact adherence to the 50-30-20 rule. It serves as a guideline rather than an inflexible mandate, allowing for adjustments during setbacks.
- Financial Growth: During periods of financial abundance, consider increasing the savings rate beyond 20%, reinforcing a proactive approach to building a secure financial future.

In conclusion, the 50-30-20 rule serves as a strategic compass for aligning your budget with essential needs, discretionary desires, and future financial objectives. It's not a rigid framework but a flexible tool that empowers individuals to make informed financial decisions and cultivate long-term fiscal health.