Managing your own money is tough – there are so many demands on your budget: rent, student loan payments, car insurance, groceries, and more. And with prices rising, it’s no wonder many people feel like they’re barely getting by.
According to a recent study by the Financial Sector Regulatory Authority (FINRA), 51% of adults said they spent more than they earned each month or earned just enough to cover their expenses. If you live paycheck to paycheck or rely on credit cards to make up the shortfall, creating a budget is essential to getting your finances back on track.
One budgeting strategy that has become increasingly popular is the 50/30/20 rule. Developed by Senator Elizabeth Warren, the 50/30/20 Rule is an easy-to-follow formula for organizing a budget and making sure you’re covering big expenses while saving money each month.
How the 50/30/20 rule works
Warren, a former law professor who was part of the Consumer Financial Protection Bureau training, first introduced the 50/30/20 rule in her book “All Your Worth: The Ultimate Lifetime Money Plan.”
Unlike other budgeting systems, which can be complex and extremely detailed, Warren designed the 50/30/20 structure to be simple and straightforward. It divides your income into three categories: needs, wants, and savings.
Allow 50% of your money for absolute necessities
Under Warren’s proposed budget plan, 50% of your net income — the amount you receive from your paycheck after tax deductions and other deductions — is spent on essential expenses. This category is for necessities, such as your rent or mortgage payment, groceries, utility bills, and transportation.
If you have a debt of credit carda car payment or student loansinclude required minimum payments in this category.
Allow 30% of your money for “wants”
It’s important to account for non-essential expenses so you can enjoy yourself responsibly. With the 50/30/20 plan, you spend 30% of your net income on what you want, such as dinners with friends, subscriptions to streaming services, movie nights or trips.
Set aside 20% of your money for savings
Finally, 20% of your net income should be dedicated to your savings and financial goals. A common question people ask is, “Does the 50/30/20 rule include retirement?” The answer is yes; Pension saving are part of the 20% bracket.
Other forms of savings that fall into this category include:
- Build an emergency fund in a high-yield savings account
- Saving a down payment for a house
- Planning future education expenses
Examples of the 50/30/20 rule
Now that you know how 50/30/20 works, let’s look at some examples of how it could be implemented at different income levels. In all three examples, the income shown is their net income after tax:
Sue, a mental health counselor who earns $48,000 a year
Sue’s gross income is $48,000 per year, or $4,000 per month. Based on that income, here’s how she would divide her money according to the 50/30/20 rule:
| 50% off Essentials | 30% on wishes | 20% off savings | |
|---|---|---|---|
| Monthly | $2,000 | $1,200 | $800 |
| Annual | $24,000 | $14,400 | $9,600 |
John, a high school teacher earning $60,000 a year
With an annual gross income of $60,000, John has a monthly income of $5,000 to create his budget.
| 50% off Essentials | 30% on wishes | 20% off savings | |
|---|---|---|---|
| Monthly | $2,500 | $1,500 | $1,000 |
| Annual | $30,000 | $18,000 | $12,000 |
Molly, a dental hygienist earning $77,000 a year
Molly has the highest gross income of the three at $77,000 per year, which gives her around $6,400 per month.
| 50% off Essentials | 30% on wishes | 20% off savings | |
|---|---|---|---|
| Monthly | $3,200 | $1,920 | $1,280 |
| Annual | $38,400 | $23,040 | $15,360 |
Applying the 50/30/20 plan to your own life
To implement a 50/30/20 budget in your own life, you can use a free CFPB worksheet. You can also use simple tools through your bank, like an automatic monthly transfer from your check to your savings account to make sure you’re saving toward your 20% goal.
Is the 50/30/20 rule realistic?
Although the 50/30/20 approach to budgeting is popular because of its simplicity, it may not work for everyone. The designated percentages may not be realistic for people living in areas with high cost of living. For example, residents of New York, Palo Alto, California, or Boston, Massachusetts, may find the 50% mark for essentials too low. And if you have significant debt, such as high student loan repayments, you may need to allocate more of your budget to debt repayment.
The 50/30/20 rule can also be difficult if you have variable income. Hourly employees who may have seasonal peaks, freelancers, or those working in the gig economy may find it difficult to maintain a 50/30/20 budget, as their income may not be consistent from month to month. ‘other.
If the 50/30/20 categories don’t meet your needs, you can adjust the percentages to better suit your lifestyle. For example, the 60/20/20 rule is a popular variation. It increases the allocation for essentials to 60% and reduces the budget for needs to 20%. Ultimately, it’s more important that you find a budgeting system that works for you and your unique needs – one that you’ll stick with for the long haul.