What Is the 50/30/20 Rule?

Financial anxiety is real. Money is today’s dominant source of stress for 44 percent of Americans, beating out personal relationships and work, according to a recent Northwestern Mutual survey. Feeling out of control plays a big role, but having a plan for your money is often all it takes to bring down stress and make real movement on your financial goals.

Enter budgeting. It can be an intimidating word, but you don’t have to be a financial whiz to get a handle on your money life—and the benefits speak for themselves. A recent study put out by the CFP Board found that a whopping 62 percent of consumers who follow a budget feel more in control of their money. What’s more, over half say they’re more confident and financially secure.

Creating a budget that works doesn’t have to be complicated, especially if you follow a simple approach like the 50/30/20 rule. Here’s how it works.

What is the 50/30/20 rule?

The 50/30/20 rule is a no-frills budgeting approach that divides your take-home pay into three different buckets:

• 50 percent for essential spending
  
  

• 30 percent for flexible spending
  
  

• 20 percent for financial goals

Let’s further break down where your spending falls into the three categories mentioned above. 

50% for essential spending (needs)

This category under the 50/30/20 rule is precisely what the name implies—bills you cannot live without. This includes your housing payment, utilities, phone bill, car payment and so on. When push comes to shove, these expenses are the bare bones of your spending.

The general rule of thumb is to spend no more than 30 percent of your income on your mortgage or rent payment, but this isn’t always so easy, especially for folks living in a pricey market. In reality, 12 million American households spend more than half of their pay on housing, according to the U.S. Department of Housing and Urban Development. If you fall in this camp, you won’t have as much cash left over each month for fun money and financial goals.

30% for flexible spending (wants)

You may find you’ve been overspending the most in this category. After all your essential bills are paid, it’s dangerously easy to overlook your financial goals and drop more cash on the fun stuff. This bucket includes everything from entertainment to shopping to eating out; basically, any nonessential spending that just makes life a little better.

To be clear, there’s nothing wrong with using a portion of your income to pamper yourself—that’s why the 50/30/20 rule devotes 30 percent of your take-home pay to flexible spending—just be sure it isn’t at the expense of your financial goals.

20% for financial goals (savings)

This can include long-term and short-term goals, from funding your retirement accounts to setting money aside for your next vacation. Saving for a down payment on a home or your kids’ college tuition? Those funds go here, as well. This category within the 50/30/20 rule is for whichever financial goals feel important to you.

Thinking about the future, especially retirement, can feel abstract, but getting your money game on point now can put you on the path to success. Financial illiteracy costs the average American $1,230 per year, according to the National Financial Educators Council. That’s money you could be putting toward your long-term goals.

50/30/20 rule vs. zero-based budgeting

While the 50/30/20 rule breaks down your spending into three categories, the zero-based budgeting method helps you assign every dollar to an expense until your paycheck is down to zero. This method allows you to prepare for your expenses ahead of time, leaving no room for overspending.

4 steps to start using the 50/30/20 rule

Here are four simple steps to help you start utilizing the 50/30/20 rule. 

Step 1: Calculate your income

The first step to using the 50/30/20 rule is calculating your post-tax income you receive in your bank account on a monthly basis. If your paycheck includes some automatic deductions, such as health, dental, or vision insurance, be sure to calculate that back in. Those expenses will count as essential spending. 

Step 2: Calculate each category's thresholds 

After you have your total monthly income calculated, break that down into three categories (50%, 30%, & 20%) to identify the thresholds you’ll include in your budget. For example, if your monthly income is $3,000, then your essential spending should be 50% of that, which is $1,500.

Step 3: Track and categorize your spending

Evaluate what your current financial picture looks like. Are you running in the red every month and using credit to cover a portion of your regular spending? Are you making progress toward meeting your long-term money goals?

These are big questions that may require a little digging on your end, but understanding your spending is the foundation of an effective budget. In other words, it’s time to clarify your real-life financial behavior. Whip out your bank statements for the last few months to get a realistic idea of what your spending habits actually look like.

Using your bank statements, break out your spending into each of the three categories (essential spending, flexible spending, and financial goals). This will help you identify if you’re currently spending less or more than the 50/30/20 rules allows. 

Step 4: Adjust & stick with it

Now you can adjust your money allocated to each category to stay within the 50/30/20 guardrails. It’s important that you continue to track your spending each month to ensure you’re sticking within your budget. If not, you’ll be aware of which areas you need to cut back on. Cutting back will not be easy, but it will be crucial to ensure you can dedicate 20% of your income to your financial goals.  

Example of 50/30/20 rule

Here’s a real-life example of the 50/30/20 rule in action: 

Let’s say we have a monthly income of $3,752. First let’s calculate the 50% of essential spending. 

$3,752 x .5 = $1,876/month

That gives us $1,876 to spend on our mortgage/rent, utilities, car payment, and all other necessary bills. 

Now, let’s calculate the fun and flexible expenses, including going to the movies, shopping, and eating at restaurants. 

$3,752 x .3 = $1,126/month

Lastly, here is how much to allocate for our financial goals, such as 401(k) contributions, emergency funds, and savings in general.

$3,752 x.2 - $750/month

What to do if the math doesn’t add up

After taking your financial temperature and reviewing your spending, you might find some areas that need tweaking. For example, more than 30 percent of your income may be going toward flexible spending, leaving your financial goals high and dry. Correcting overspending in one area is all it takes to balance things out under the 50/30/20 rule.

Spending too much on essential bills? You may be able to negotiate some of your bills down, rather than cutting them altogether. Zero in on things like your cable package and cell phone bill. You might even find success talking down your credit card interest rates and fees. Refinancing your mortgage or student loans is another potential money-saving strategy that could reduce your monthly debt obligation. If you’re still going overboard, consider eliminating expenses you’d be fine living without, like splurgy subscription services.

Clarifying your financial goals

Once your 50/30/20 budget is up and running, there still may be one detail that needs ironing out—the financial goals category. Think big, then back into the numbers. Looking to put a 20 percent down payment on a home? Do the math and set a savings target. From there, figure out how much money you can carve out of your budget each month to start moving toward your goal. (It’s all about baby steps.)

Everyone’s big-picture financial aspirations are different, but saving for retirement is pretty universal. Experts generally say you should aim to build an annual income in retirement that’s equal to roughly 75 percent of your pre-retirement income. Getting there won’t happen overnight, but investing can help you make progress faster. Look to tax-friendly accounts like a 401(k) and Individual Retirement Accounts (IRAs) to really maximize your efforts.

Retirement aside, one financial goal that deserves your attention is building up a strong emergency fund. Focus on gradually saving up three to six months’ worth of expenses in a savings account you can access quickly the next time you’re in a pinch.

The whole idea behind a budget is to make managing your money as stress-free as possible. For many, the 50/30/20 rule makes that possible. Think of it as your budgeting North Star.