50/30/20 Rule
Definition
A budgeting guideline that allocates 50% of after-tax income to needs (housing, food, insurance), 30% to wants (entertainment, dining out), and 20% to savings and debt repayment.
The 50/30/20 rule, popularized by Senator Elizabeth Warren in her book "All Your Worth," provides a simple framework for budgeting that doesn't require tracking every dollar. It divides after-tax income into three buckets: needs, wants, and savings/debt repayment.
Needs (50%) include housing (rent or mortgage), utilities, groceries, insurance, minimum debt payments, transportation, and healthcare. These are expenses you must pay regardless of lifestyle choices. If your needs exceed 50%, it's a sign that you may need to reduce fixed costs — a smaller apartment, cheaper car, or refinanced loans.
Wants (30%) cover everything you enjoy but don't strictly need: dining out, entertainment, hobbies, subscription services, vacations, and upgrades beyond the basic version of necessities. The 30% limit encourages enjoying life while preventing lifestyle inflation from consuming all your income growth.
Savings and debt repayment (20%) includes emergency fund contributions, retirement savings beyond employer match, extra debt payments above minimums, and investment contributions. This is the category that builds long-term wealth and financial security.
The 50/30/20 rule is a starting point, not a rigid prescription. High-cost-of-living areas may push needs above 50%. Aggressive savers targeting early retirement might flip it to 50/20/30 (saving 30%). The value is in providing a benchmark — if you're spending 70% on needs, something needs to change regardless of the exact target percentages.
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Frequently Asked Questions
What if my needs are more than 50% of my income?
This is common in high-cost-of-living areas. Focus on the largest expenses: can you reduce housing costs, refinance debt to lower payments, or find cheaper insurance? If needs are 60%, try adjusting to 60/20/20. The key principle is ensuring savings aren't sacrificed entirely.
Does the 50/30/20 rule work for high earners?
High earners can often do better than 20% savings since needs take a smaller percentage of income. If you earn $200,000 and needs are only 30%, saving 30-40% is achievable. Use 50/30/20 as a minimum baseline and increase savings as income grows.