When it comes to budgeting, everyone’s a little different. Some people get really into spreadsheets, tracking every dollar as it goes in and out of their accounts. Others break out into hives at the mere mention of the word “budget.” (Been there.) No matter who you are, though, all you really need for a healthy relationship with your money is a solid, high-level framework for where it should all be going. (C’mon, are you really going to pull up that Excel sheet in line at the taco truck?) That’s where the 50/30/20 rule for your money can come in handy.
OK, it’s not actually a “rule” in the must-never-be-broken sense. Think of it as a guideline — or, if you’re dealing with debt or other financial challenges, a general direction. (And fun fact, the rule was popularized by none other than now-Senator Elizabeth Warren and her daughter Amelia Warren Tyagi in their book All Your Worth all the way back in 2005!) Here’s how it breaks down.
How the 50/30/20 rule for budgeting works
Under this approach, you’re divvying up your take-home pay into three buckets: 50% to needs, 30% to wants, and 20% to Future You. That’s 50/30/20.
50% to needs
This includes bills, groceries, transportation, housing, minimum debt payments, work clothes, and other things that you have to pay for. The stuff that, once set, you have little to no control over.
30% to wants
You don’t need rooftop margaritas, Netflix accounts (no, really), or trips to Milos … but fun’s important. In fact, making sure you have the fun stuff accounted for can be the key to staying on-track with the budget in general. (Who wants to stick with a zero-fun plan?)
20% to Future You
Three things go in this bucket: debt payments beyond the minimums, saving, and investing. This one — the “paying yourself first” bucket, if you will — is the hardest one to commit to on a regular basis, of course, but it’s also the one that, if you can cultivate it properly, will benefit you (and your loved ones!) most in the long run.
But wait — what if my needs eat up more than 50% of my income?
Understandable. That’s the key question, right? Some of your costs might overfill your “needs” bucket beyond 50%. If you’re carrying debt, have kids, and/or are dealing with life, “needs” might be the biggest — or only — bucket for a while. If you live in a city like NYC or San Francisco, rent might mean “50% to needs” looks more like “60%+ to needs.” (That’s why, if you googled this topic, you might also find something called “the 60/30/10 rule” — it’s basically the same thing, just adjusted.)
Some costs will fall into the gray area between two categories, too. (You might consider your gym membership non-negotiable, while others will toss it in the “wants” bucket. Similarly, if you have a disability, a delivery service or takeout budget might be more than just a “nice to have.”) The point is to maintain your decided-upon ratio on a regular basis to keep your various costs under control: If you’re in a 60/30/10 period in your life now, it is what it is. Just do what you can to work your way up to 50/30/20 eventually, because that 20% is the piece of this pie that’ll keep working for you as you go (thanks, compounding!). And waiting could cost you hundreds of thousands — even millions — in the long run.
Why 50/30/20-ing works
OK, let’s run the simulation: Imagine it’s payday. Hooray! Time to divide that chunk of change that just landed in your account. You know the “needs” half will be non-negotiable, so that money won’t be going anywhere for a second. Let’s focus on the other two.
First, here’s a quick mental-math tip: Take your total paycheck amount and move the decimal point to the left one time. Congrats, now you know what 10% of your paycheck is (you can let that last digit fall off here, it now represents a fraction of a cent). Use this new number to calculate 20% (double it) and 30% of that paycheck (triple it), estimating with rounded amounts if you need to. Now you know how much you’ll need to sock away for those extra debt payments, savings account(s), and investing — and most importantly, how much you’ll have leftover to spend on your “wants.”
Now let’s zoom out. Big picture, you’re using the 50/30/20 ratio to assess what expense category you need to “work on” at any given time. Some expenses can’t be helped, of course (see: the previous section), but when you have this framework and see that you overspent on extracurricular stuff last month, for example, you’ll have a better sense of where that money came from — and what category you have to pull back on next month to account for that particular oopsie.
Another benefit: the 50/30/20 rule can help you better estimate your salary requirements the next time you ask for a raise or negotiate a new job offer.
Whatever budget you use, let it set you free
The best part is, this kind of rough framework is designed to take some of the money stress off your mind on a day-to-day basis. You know how much you have to spend on the fun stuff, so you don’t need to get twisted up in the angst of it all, worrying it’ll send you over the edge (or feeling bad if it does).
No matter what method you choose, keep this in mind: The best budgets are designed to free your brain (and your bank account), not break it. We even have a downloadable 50/30/20 rule budget template to get you started — it’s free for Ellevest members, but available to all. Because you deserve that peace of mind.
Need more guidance? Budget some time for a complimentary 15-minute consultation with an Ellevest CFP® pro.