DR 068: Is the 50-20-30 Budget a Good Rule of Thumb?

Optimized-TheHow can the numbers 50, 20, and 30 help you manage your finances? Today, we’re going to talk about the 50-20-30 rule of budgeting. A company called LearnVest popularized this rule of budgeting recently, but it’s been around long before them. I’ve seen many financial experts write about it, as well.

The bottom line is that the 50-20-30 budget has some advantages as a starting point, but, like most financial rules of thumb, it can also lead you astray. So today, we’re going to walk through this form of budgeting and talk about its pros and cons.

What is the 50-20-30 budget?

The 50-20-30 budget divides your money for spending and savings into three buckets. (It’s all based on after-tax dollars.)

The first 50% of your budget goes towards necessities, including shelter, food, utilities, transportation, clothing – the things you need to get by day to day. This rule of thumb says that those expenses should comprise no more than 50% of your take-home pay. So that’s the first financial “bucket.

The next 20% of your budget goes to long-term savings and extra payments on any debt you may have. For example, this bucket would include contributions to your 401(k) or IRA.

Also, if you have a car loan, for instance, paying the minimum payment would probably be considered a necessity because you need a car to get from point A to point B. But if you make extra payments on that car loan debt, that goes into the 20% bucket.

Basically, the 20% bucket is for your financial priorities – your long-term savings and some debt repayment. This bucket does not include short-term savings, like a vacation. That’s for the third bucket.

The 30% bucket is for your lifestyle choices. This includes things like vacations, entertainment, gym fees, hobbies, pets, eating out, cell-phone plans and cable packages. These are things you do not have to have to get by, but are lifestyle choices. So the remaining 30% of your take-home pay goes into this bucket.

To sum it up, with this budgeting rule, you put 50% of your money to necessities, 20% to long-term savings and debt payments, and 30% to lifestyle choices and non-necessities.

A personal shift in thinking

I do want to give you my thoughts, specifically, on the 50-20-30 plan for budgeting. But first, I want to talk about a shift in my own thinking on money that’s occurred in the past five or six years.

Before I started blogging about personal finance in 2007, I thought about money like most people do. I went to college, got a job, and started spending. We saved some, but our savings was typically in the 5-15% range. We’d contribute to our 401(k) and a little bit beyond that, but nothing more.

My attitude was that my job was going to finance our living expenses until we retired at age 65. It was all about the job. I’d go to work for 40 to 50 hours a week, earn income, save a little, and spend the rest.

With that mindset, I did what a lot of people do. I bought a new car, the expansive cable TV package, and the big TV. We bought a big house, and then a bigger one. We took expensive family vacations. We did things that most middle-class Americans do. In that sense, we were very normal.

But that all started to change when I started this blog and began to write extensively about personal finance. The change wasn’t immediate, of course. But as I wrote and blogged about personal finance, I started to save a little more money, pay off more debt, and watch my retirement nest egg grow. Then, I suddenly had this “aha” moment.

I looked at the money we were saving. It was starting to add up and become more significant. It takes some time because you need to benefit from the power of compounding. But after a while, I started thinking about how much my money was working for me. It was almost like sending out employees who were working for me. That money was starting to grow into something significant.

And then I started to see how that money could fund a fair amount of our expenses, particularly if we became more frugal with our lifestyle. And then I began to realize that the most important thing to me was not a bigger house, expensive vacations, 200 cable channels, or a new car. The most important thing was my freedom.

Don’t get me wrong. I didn’t want to quit and not work at all. But I wanted the freedom to work when I wanted to work, where I wanted to work, doing what I wanted to do. I didn’t want to be chained to a desk five days a week.

I realized that I could get there by giving up things that had once seemed important to me. I could trade in the bigger house, new cars, cable packages, and expensive vacations for freedom. I could trade those things for a lifestyle where I spend less money and save more, which would let me have this lifestyle where I have the ability to work where and how I want.

When you’re just starting out, this seems like an impossibility. When I graduated from college, we had no money and a lot of debt. I had about $55,000 in student loans, so we had a negative net worth. So if I saved $500 or $1,000 or whatever, it might help me when I turned 65. But how was that going to help me now?

The truth is, that at that moment, it wasn’t going to help me much. And I think that’s a big reason why many people don’t save more money or cut back on expenses. They don’t see the advantage in the near term. The benefit is always 20, 30, 40 or more years away.

And eventually, that just shifted for me because I’d been saving for a while. As I learned more about personal finance, I started to look at money in a different light. Now, I don’t see money as a way to buy “stuff.” I look at it, instead, as a way to achieve freedom for myself and my family.

An example of financial freedom

Have you ever noticed that people you think have a lot of money seem cheap? I’ve had plenty of discussions with people about that idea. You know that the person is probably wealthy, but they watch every dime.

In some ways, my stepmother, who passed away a couple of years ago, was that way. She watched every dime. And you know why? She lived off her wealth. By retirement, she had done pretty well for herself. She had a part-time job, but mostly lived off her nest egg of about $1 million.

How much income can that generate in a year? Well, if you use the 4% rule of thumb, $1 million generates $40,000 in income. That’s not a lot of money, so my stepmother had to watch what she spent. But by making her nest egg last, she was able to enjoy freedom.

For instance, she was able to take a part-time job she loved. She was a pilot for years, and her part-time job was with a company that built things for pilots. It didn’t generate a lot of income, but she could do it because she loved it and had money saved to live on. And then she could do things in her community on the side, as well.

As I get older, that’s what I’m trying to achieve, too. And looking at money this way puts saving into a whole new category.

Changes in thinking lead to changes in doing

Now I’m stunned when I see someone I know is struggling financially pull in with a brand new, 100% financed car. I guess they can afford the payment, but what are they thinking? To me now, people just seem so casual about the money they spend. And I’m not perfect here, either. But I’m trying. For example, I’m reducing the cost of our cell phone plan by moving to prepaid plans with Republic Wireless. I’m also reducing our cable package. And eventually I want to downsize our home. I look at how much this big house costs us to heat and cool and maintain, and we just don’t need the extra space. So we’re working on those things.

The point to my ramblings is so you understand how I look at something like the 50-20-30 budget.

My thoughts on 50-20-30

So what are my thoughts on this approach to budgeting?

I actually think that 20% is a pretty decent savings rate. Sure, some folks could save more. For instance, Mr. Money Mustache, who saved upwards of 70% of his income and retired at age 30. This is kind of extreme, but it’s fun to read his blog and dream a little.

But here’s the thing: saving 20% of your income is hard for a lot of people, given their current spending habits. When you think of the 50-20-30 budget, the first thing to consider is just how much people spend on shelter and cars.

Like a lot of folks, if you’ve bought a home, you may have a large mortgage. And you may also have that $20,000 or $30,000 or $40,000 bank-financed car sitting in the driveway. Depending on your income, those two things alone could easily eat up 50% of your budget.

So if that’s you, then the 50-20-30 budget can actually be a good thing for you. It may help shine some light on these issues and suggest where you may need to make some changes. Fifty percent for necessities may seem like a lot, but a lot of families are spending far more than that. And if that’s you, you may need to look at ways to reduce your essential expenses as much as possible.

Rules of thumb are a starting point

The second thing to consider about this budget is that rules of thumb are fine – as a starting point. It’s okay to compare your current spending to the 50-20-30 budget, but it’s just a starting point. It isn’t one-size-fits-all.

Part of the efficacy of this rule of thumb depends on your income. Are you making $50,000 a year or $500,000 a year, or something in between? Let’s say you make $100,000 and you’re thinking, “I don’t know if I can get by with only 50% of my income going to necessities.” Well, how do you think folks making $60,000 do it? You can get by.

The first thing to recognize is that it’s all about the choices you make. I know that circumstances vary, but by and large, spending is a bigger problem than income for people. We all want to make more. I get that. And some of you may be in difficult circumstances – maybe unemployed or seriously underemployed.

But for most folks in the United States as a whole, our biggest problem isn’t that we don’t make enough money. It’s that we spend too much money. If you’re making anything above average in income, you should try to do better than spending 50% on necessities and only saving 20%.

Necessities vs. lifestyle choices

Saving 20% is a good start, but you should aim for more. This goes against the traditional rule of thumb to save 10-15% of your income. But saving 20% is possible, and it’s a good goal. It all depends on your priorities.

After my “aha” moment in my own personal finances, I wouldn’t be happy any more with a 20% savings rate. I want to save more. Sure, the 50-20-30 budget is a good rule of thumb. But many of us can do better – often without sacrificing all that much.

Part of the problem is that we don’t know the differences between necessities and lifestyle choices. For most of our spending, it’s really a lifestyle choice. For instance, you need a place to live. But the house you choose to live in is a lifestyle choice. Many of us could significantly reduce our monthly expenses by moving into a smaller place. The same is true with the cars we choose to drive and the clothes we choose to wear.

When we look at all of these necessities, we tend to spend more than we truly need. And I speak from experience here. So when you think about necessities in this 50-20-30 budget, be honest. You may find a few things that fit into the necessity bucket, but you’ve gone overboard and turned those things into an expensive lifestyle choice.

Consider using YNAB

I’m a big fan of YNAB – You Need a budget. It’s the budgeting software I use, and it’s incredibly helpful.

YNAB doesn’t really deal with this 50-20-30 formula. It’s more of a nuts-and-bolts approach to how much you spend on the categories you create. You could use it to create a 50-20-30 budget with three categories: necessities, financial priorities, and lifestyle choices. You could even make those your high level categories, and then add some sub-level categories. That’s fine, too.

But what I really like about YNAB is that it forces you to think beyond the “rules of thumb” and to look at the details of how you’re actually spending your money. It’s been a real eye-opener for my wife and I. I looked at what we spent at restaurants and Starbucks last month, and what we spent on clothes. It’s very revealing.

To truly manage your money, you need to go beyond these rules of thumb, including the 50-20-30 budget. It’s fine as a starting point, but you need to look at the specifics of how you spend your money and how you can make better choices. It’s been a process for my wife and I, for sure.

The bottom line here is that once you start down the path of living like everyone else does and pursuing the American Dream (as it’s commonly defined), it’s hard to reverse course. It takes time. It doesn’t happen immediately. If you’re just starting out, keep this in mind so you don’t go down this road at all. But if you’ve already started spending more than you should, figure out where you can cut back on your expenses – sometimes with almost no sacrifice – and think about how different choices now can buy you financial freedom later.

Published or Updated: May 27, 2014
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.


  1. Jaspreet says:

    Great topic

    Words that this rule is starting point is very clicking to me

    This is the first month when me and my wife are actually monitoring our spending habits from Day 1 of the month and it has brought us closer too :)

    Thank You Sir for ur articles

  2. Mark Ross says:

    I think the 50-30-20 rule is a good rule to follow, but adding more on your savings monthly, maybe making it the 50-20-30, 30% savings, is much better.

  3. Kenneth says:

    This is a fine goal for average Americans. Those caught up in the lifestyle choices fed to us by advertising. Expensive cell phones, cable tv, vacations, entertainment, alcohol, etc. For me, once I started down this road, it became more interesting to see how far I could reduce my expenses and still keep my home and nice cars. My current savings rate is 67 percent of net income. My second home is up for sale, and after it goes, my savings rate goes up to about 80 percent. Good thing, too, because I am retiring in 18 months so I’ll need every penny.

    I do NOT miss my expensive cell phone plan, car payments, cable tv or expensive vacations. You make choices and you learn to live with them. Happily!

    • Rob Berger says:

      Kenneth, congrats on an amazing savings rate!

  4. Jeff says:

    I have to say. I almost never comment on blog sites but I like your podcasts and this one struck a nerve. I read the Mr. MoneyMustache site and wish I could have early retirement but there are certain factors that allow for that. One is cutting expenses but there is a certain level of income needed. Anyway, my diatribe has to do with saving and the difficulty of pursuing a high savings rate when personal freedom from an accumulation of assets seems so far off.

    Were doing better than most with a paid off house and by next year would have 6 figures saved in taxable accounts but at age 40 financial freedom won’t happen until my mid-fifties.

    Still it feels good to know we have no debt and a good amount of savings.

    Keep up the Podcasts I like them. This one was nice because it revealed more of your journey.

    • Rob Berger says:

      Jeff, thanks for the comment and congrats and your progress toward financial freedom.

  5. Emma M says:

    Firstly, WOW $1 million savings? Then another “$40,000 isn’t a lot to live on!”. I live in the UK and the conversion rate right now means $40,000 is approximately what we have to pay the mortgage, pay debt, pay the bills and raise 4 children on. I don’t just mean wages, I mean the extra support we get here in the UK for being a low income family, all of it adds up to that.

    I have to say that although things are tight, we manage on that, so I am sure a lady on her own can.

    Back to your point of 50-20-30, I think that is a sensible plan, one I would be adhering to if my debt wasn’t the 50 part.

    I must admit that I was more frivolous in my 20s than I am in my 30s and indeed, if I had thought how I thought and acted now, I’d be in a better position today. I am still on the path to having my mortgage paid off by the time I am 42, which I don’t think is too bad in today’s market.

    • Rob Berger says:

      Emma, having the mortgage paid off by 42 is incredible. Congrats!

  6. Mel says:

    This is an awesome post. I completely agree that the 50-20-30 rule should be a starting point, I also think that the best way to improve this is dropping the cost of your necessities. People need to realize that their 40K car isn’t a necessity. By dropping the cost of your necessities you are able to have a very flexible budget. I would also like to argue that your budget should reflect your goals.

    I have only just completed my first year in the work force with 34K salary. My budget is ~35-50-15. My goal right now is eradicating my student loan and fingers crossed it will be gone by the end of this year. Once that’s gone, I see my 2015 budget moving to 35-27-38 as my goal is to travel and see a bit of the world, build my emergency fund, start saving for retirement and repay a small loan to my parents. Whereas my 2016 budget will be 35-35-30 to continue some travel but also save for medium-long term goals such as getting serious about retirement and start saving for a down payment for a condo or townhouse.

  7. Neil Crawford says:

    I understand that you use after-tax income, but do you add back “Pre-tax Deductions” to income?

  8. Bij says:

    I was just reading the “Financially Fearless” that talks about this rule. This is a really dumb rule. It might be a good way to make people save at least 20%. She could’ve just said 20% rule. The necessities are fixed costs, it should not be a percentage of your income. When your income grows, your cost for essentials should not go up.

    I was saving almost 50% of my income. My wife just started working increasing our income by 80%, and her entire paycheck (minus job related expenses like commute and child care which is like 10% of her income) goes straight to savings.

  9. Bruce Wilbat says:

    Thoreau said something to effect that freedom was NOT having enough money to do what you wanted, but the discipline to live without material goods.

    I got a start on keeping track of all my expenses on a monthly basis as for the first 3 1/2 years of my career, I traveled 100% and had to do so to submit my expenses. When I came off the road, and first moved into a house, and having no experience with the total of my housing, utilities, insurances, and other monthly living costs would be, and being an accounting professional who knew that expenses should not exceed income, I continued recording my expenses by category each month, and at the end of every month, summarizing my expenses by category to review the plusses and minuses.

    I also kept a year to date budget summary by category (helped much by the coming of Lotus 1-2-3 and then Excel). It gave me great pride and satisfaction at the end of each month to see a) that my overall expenses were less than my income and that I had generated savings, and b) that I had the information to review my expenses, knew why I was overexpended (or under) in any category, but more important, why, i.e. over in Gifts in any month when a significant family member’s birthday occurred, or Christmas (but under in other months), or when a significant auto repair occurred. Of course, not to be overexpended ina any month when annual property taxes or insurance were due, I charged 1/12 of these amounts to each month’s budget also.

    Years later, when I first had my first meetings with insurance company representatives and financial planners, I was very proud and delighted that the first thing they wanted me to do to determine future insurance expense possibilites and investments was to record my actual expenses for a few months. Hah! I had a nice smile when I told them I had been doing that for years – and presented my latest spreadsheets.

    Sorry for the diatribe, but the lesson is that if you really want to save, you really have to know where your money is going, so that YOU can decide which expenses are most important to you, which you can cut back on, i.e. which are MUSTS and which are merely CONVENIENCES. Do you really need those $5.00 lattes you think you “deserve” each day,or woud you llike another $1,000 in savings each year?

    If you see where your monies are going, you’ll know where to get more savings!

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