5 min

What Is the 50/30/20 Budget Rule?

Sep 19, 2022
in a nutshell
  • The 50/30/20 rule splits your take-home pay into: 50% for essential spending, 30% for flexible spending, & 20% for financial goals.
  • Before you begin, step back and analyze your essential spending, financial goals, and flexible spending.
  • Your financial goals will be ever-changing so make sure to account for that as you evolve your budget over time.
Image of Creating a budget that works does not have to be complicated, especially if you follow a simple approach like the 50/30/20 rule.
in a nutshell
  • The 50/30/20 rule splits your take-home pay into: 50% for essential spending, 30% for flexible spending, & 20% for financial goals.
  • Before you begin, step back and analyze your essential spending, financial goals, and flexible spending.
  • Your financial goals will be ever-changing so make sure to account for that as you evolve your budget over time.

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

How can I get started using the 50/30/20 rule?

Before you begin planning your finances under the 50/30/20 rule, back up and 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.

You should begin seeing patterns pretty quickly, with your spending naturally falling into the three categories mentioned above. Let’s break them down.

Essential spending

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.

Financial goals

This can include both long-term and shorter-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.

Flexible spending

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.

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.

This material has been presented for informational and educational purposes only. The views expressed in the articles above are generalized and may not be appropriate for all investors. The information contained in this article should not be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product. There is no guarantee that past performance will recur or result in a positive outcome. Carefully consider your financial situation, including investment objective, time horizon, risk tolerance, and fees prior to making any investment decisions. No level of diversification or asset allocation can ensure profits or guarantee against losses. Article contributors are not affiliated with Acorns Advisers, LLC. and do not provide investment advice to Acorns’ clients. Acorns is not engaged in rendering tax, legal or accounting advice. Please consult a qualified professional for this type of service.

Marianne Hayes

Marianne Hayes is a content strategist and longtime freelance writer who specializes in personal finance topics. 

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