50/30/20 Rule

Humans are fallible—sometimes we just need guidelines. If you struggle making sense of a sea of budgeting systems and apps, consider the 50/30/20 rule. Developed by Elizabeth Warren, a senior U.S. Senator from Massachusetts and expert in bankruptcy law, the 50/30/20 rule states that your after-tax income should be roughly divided three ways:
- 50% to needs
- 30% to wants
- 20% to long-term savings
Example of Needs
- Housing: Rent, mortgage, homeowners insurance, property taxes
- Transportation: Car payment, gas, bus or train passes, parking fees
- Insurance: Auto, life, homeowners, health, renters
- Utilities: Gas, water, electricity, internet, cell phone
- Loan payments: Credit card debt, student loans
- Short- to mid-term savings goals: Down payment on a car, a new roof, replacement furnace
- Health care: Insurance premiums, deductibles, prescriptions
While the necessities are easy to agree on, wants are subjective and personal. A vacation Jack considers valuable—essential, even—Jill finds frivolous and wasteful. The 50/30/20 rule encourages you to be explicit about your wants. But don't beat yourself up over them. Give yourself permission—within a reasonable set of constraints—to spend some of your money on things that make your life enjoyable.
Examples of wants
- Gym memberships
- Clothing
- Online subscriptions
- Cable TV
- Furniture
- Vacations
- Hobbies
- Eating out
Savings
There is no financial habit as important as saving. Unsurprisingly, it's also the hardest. Saving a little each paycheck can make things much easier when unexpected expenses come up. Whether you follow the 50/30/20 rule or not, you should make a goal to save a significant portion of your income for rainy days and retirement. The former is hard because, with our money, we're optimists. What could go wrong? Retirement, on the other hand, is difficult because it can seem so distant. (Surely I can save for retirement when I get a better job, right?).
Make Adjustments
Summary
The 50/30/20 rule is a simple, practical rule of thumb for individuals who struggle to budget. It offers guidelines for enjoying your income while putting savings on autopilot. Some folks will disagree, calling it too lenient or too strict. That's fine. Skilled budgeters and savers will develop their own habits and can be as disciplined as they like. But, if budgeting isn't natural to you—especially if you're young, and you've avoided deep debt—the 50/30/20 rule gives you permission to relax a bit and put savings on autopilot.
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