What is the 50/30/20 Rule?
Up until today, I had never heard of the 50/30/20 rule, which may seem weird considering we managed to save while living on one income. So I started doing some research. I don’t like to budget and never have so I guess that’s why I never heard about this rule before. I suppose it makes sense for those who need some guideline as to how to divide their money, but I see a lot of problems with this rule too.
What is the 50/30/20 Rule?
Basically, it is a simple budgeting framework that helps you divide your after-tax income into three main categories:
50% Needs (rent/mortgage, groceries, utilities, insurance, transportation, childcare)
30% Wants (dining out, clothing, entertainment, hobbies, subscriptions, tickets to events)
20% Savings/Debt Repayment (credit card debt, loans, emergency fund, retirement, new vehicle, vacation, down payment on a home, investment account)
50/30/20 Rule
Divide your after-tax income into needs, wants, and savings
What are the benefits of the 50/30/20 Rule?
There are some benefits to budgeting your income this way.
It’s great for people just starting out with budgeting their money or anyone overwhelmed by budgeting.
It gives clear percentages, making it easy to organize your finances.
It allows room for both financial responsibility and personal enjoyment while still keeping a certain amount of your money to save.
You can adjust the ratios based on your situation (e.g., 60/20/20 for high-cost areas).
It helps you distinguish between needs and wants, which is the key to saving money.
Always allocating 20% to savings or debt payoff helps to build financial security over time.
What are the issues with the 50/30/20 rule?
Allocating 50% of your after-tax income may not allow for all the other needs that people have these days, such as childcare, pet care, and debt. Credit card debt alone can put quite a dent in your income each month.
50% on needs might not be realistic in cities where housing alone can exceed that. Even renting an apartment these days can require two salaries.
Irregular earners (freelancers, gig workers, part-time workers) may need a more flexible approach.
Expenses (like a cell phone plan) may blur the line between need and want.
Sometimes, debt has to be prioritized over savings. Paying down a large credit card debt is more important than saving for a vacation.
Is childcare covered in 50% needs
Childcare can be incredibly expensive and may not be covered in the 50% needs amount
The Bottom Line:
The 50/30/20 rule is a solid starting point if you’re new to budgeting or want a big-picture method. But as your finances grow more complex, you might need a more detailed or personalized plan. Personally, I think that when you are in the thick of trying to save money, this rule allows too much room for your wants over savings. If you can hunker down on trying to save your money as much as possible, it will pay off later on as your kids are growing and you are thinking about your future retirement plans. Your life is always changing too - jobs are lost, you may experience an illness preventing you from working, your car is not repairable, major house repairs, etc. I think using this rule as a guideline is fine but give yourself some grace if major life events require changing how much you can give to wants or savings.