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Budgeting is a cornerstone habit for building wealth. One approach to creating a budget is the 50/20/30 rule. In this article we cover this method to managing your money and how to apply it to your finances.

How can the numbers 50, 20, and 30 help you manage your finances? Well, they could completely transform your budget.

Today, we’re going to talk about the 50/20/30 rule of budgeting. A company called LearnVest popularized this rule of budgeting a few years back, 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.

Listen to Our Podcast on This Budget Type:

What is the 50-20-30 budget?

At its basic level, the 50-20-30 budget divides your after-tax, take-home pay into three buckets.

The first 50% of your budget goes towards necessities, including shelter, food, utilities, transportation, clothing. These are the things you need to get by day to day.

It also includes minimum payments you need to make on your debts. Without making them, you can suffer some serious consequences! So minimum payments on your car loan, credit cards, student loans, etc. also go into this bucket. This rule of thumb says that those expenses should comprise no more than 50% of your take-home pay.

Related: How to Bring “Shock and Awe” to Your Monthly Expenses

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. And if you’re trying to become debt-free, the extra debt payments would go into that budget.

Basically, the 20% bucket is for your financial priorities — your savings for the future 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. It includes things like vacations, entertainment, gym fees, hobbies, pets, eating out, cell-phone plans, and cable packages. These are things you don’t really need to get by. 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 in an online savings account, but our monthly 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.

Resource: Here’s How Much to Save (and How to Do It!)

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 and other 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 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 becoming 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.

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. For example, 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 spent less money and saved more, which would let me have this lifestyle where I have the ability to work where and how I want.

Learn More: 100 Ways to Improve Your Finances (Most in Under 10 Minutes)

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, which means 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 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 like that. 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.

Resource: Our Favorite Personal Finance Books

Changes in thinking lead to changes in doing

These days, 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.

Don’t get me wrong —  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?

First off, I actually think that 20% is a decent savings rate, especially compared to the average savings rate in the United States. Sure, you hear about people like Mr. Money Mustache, who saved upwards of 70% of his income and retired at age 30. But he’s on the extreme end of things.

Most people would do really well to save 20% of their income.

But what this budget reveals is just how much a lot of people spend in that 50%-for-necessities category. If you can’t save 20% of your income, could it be because you’re spending too much on your home and car, especially? When you buy a home with a large mortgage and an expensive, financed car, those things alone can eat up half of your take-home pay.

So that’s where I think this budget can be helpful. It can give you a framework for examining your spending, so that you can see where you need to make changes. As you look at your spending through this particular lens, here are a few other things to consider:

Rules of thumb are a starting point

Keep in mind that this budget framework, like any other, is a starting point. It’s just a rule of thumb, but it’s not one size fits all.

The goal here isn’t to contort your spending until it exactly matches these categories. The goal is to look at your spending through this lens to see where you might make some tweaks.

Related: How to Live on a Budget with 4 Valuable Lessons

Part of this rule’s ability to work for you will depend on your income. Do you make $35,000 per year or $350,000 per year? Or do you fall somewhere in between?

If you’re on the upper end of the income range but can’t figure out how to fit your spending into this framework, you may have an issue over-spending on necessities. For those at the lower end, a higher necessities budget may be necessary for a while, especially if you live in a place where housing is more expensive.

For most people in the United States, on the whole, the biggest problem isn’t income, though. It’s spending.

If you make anything above average on your income, you should be able to at least fit into these categories. At best, you’ll spend less than half your take-home pay on necessities, and be able to up your savings rate.

Again, though, this isn’t all cut and dry. Sometimes you’ll want to adjust the budget categories to fit your circumstances. Here are some examples:

  • Getting out of debt: If your goal is to pay off your debts as soon as possible, consider reducing your spending in both the necessities and lifestyle choices categories (especially the latter). Throw that extra money at your debt. Once you’re debt-free, consider moving towards this 50-20-30 structure.
  • Retiring early: This is a great budget structure if you want to retire at 65 or even a little bit early. Saving 20% of your income, especially starting at a young age, is a great way to move towards your retirement goals. But if you want to retire in your fifties or even earlier, you’ll have to save more. This might mean downsizing or driving an older car to cut down on your necessities. Or it could mean restricting your lifestyle choices category even further to up your savings rate.
  • Starting out: When you’re just starting out on a small income, you may need to tweak your rates here, as well. You should first seek to limit your essential expenses as much as you can. Live in a cheaper apartment. Drive an older car. But then cut back on the lifestyle choice category, too. That way, you can maintain a relatively high savings rate (though maybe not 20%) until you get a pay increase.
  • Increasing your income: As you increase your income over time, consider moving out of this framework. Instead of increasing each category’s spending amount with a pay raise, increase just your savings category. Or maybe add a bit to your lifestyle expenses category for a nice vacation, but then add the rest of the increase to savings. In this way, you can avoid lifestyle inflation and achieve financial freedom earlier.

Necessities vs. lifestyle choices

Saving 20% is a good start, but maybe you aren’t quite there yet. Or maybe you have a good income that could allow you to save more. Saving more than 20% is possible, though, even on an average income. It all depends on your priorities.

After my own personal finance “aha” moment, I decided I wasn’t happy with a 20% savings rate anymore. I wanted to save more. So I started out with the 50-20-30 framework but planned to quickly move beyond that.

For me, this came down to understanding the difference between necessities and lifestyle choices. Many of our spending choices, even those that fall into the necessities category, result from lifestyle choices.

Sure, you need a place to live. But the house you decide to live in is a lifestyle choice. Many people could significantly reduce monthly expenses by moving into a smaller place or a different neighborhood.

Likewise, you have to eat. But reducing your grocery spending is usually an easy way to save money every month. You may also be able to reduce spending on other necessities, like clothing and your vehicle.

The key when looking at these spending categories is honesty. You may find that some things fit into your necessity budget. But maybe you need to take part of that spending and put it into the lifestyle choice bucket.

Learn More: How to Create Wealth and Make Your Life Easier

For instance, you need a car and don’t have enough saved to buy one in cash. You can choose an older car with a $130 monthly payment, a necessity. Or you can choose a car with a $200 monthly payment, and pull that extra $70 from the lifestyle choices category.

(The best choice? Opt for the lower payment, and save the difference!)

One other note here: What looks like a lifestyle choice for some individuals may be a necessity for others and vice versa.

For instance, I work from home full-time. That means I need good, reliable internet access. My internet payments fall into my necessities category. But if you work outside the home and don’t need internet at home, consider cutting it out altogether or paying for the cheapest plan.

Cars are similar. If you live in a city that offers a robust transportation system, you may not need a car. Sure, taking the bus may be slightly slower, but it’ll still get you where you’re going on time. But if you live in a cheaper house in the suburbs or work in a city without a good transportation system, you may need a reliable vehicle to get to work.

As you can see, some of these expenses are dependent on your circumstances. So, again, the goal is to be honest with yourself about needs versus wants.

What Counts as After-Tax Income?

After I originally talked about this topic back in 2014, I got a few questions about what counts as after-tax income. For instance, if your HSA and 401(k) savings come out of your paycheck before taxes, does that go towards the 20% savings category? Or do you save 20% on top of that?

The answer, again, is that it depends.

One commenter asked about pension payments. In this case, I’d highly recommend saving 20% on top of the pension payments. So those contributions wouldn’t count towards your net income amount.

This is, by the way, because you typically have very little control over pensions.

Your 401(k) contributions, on the other hand, may be different. In this case, you have more control over the investments. You could decide to count the 10% (or whatever amount) of your paycheck that goes into your 401(k) as part of your “after-tax” income. Put it into the 20% savings category.

As far as other deductions, such as dependent-care accounts and HSAs, those are really more for necessities or short-term savings.

If you’re spending your dependent-care account money on dependent care that year, it should be counted as part of your necessary expenses. (Necessary, that is, if both spouses work, so that you must have childcare.)

You might decide to split your HSA savings. Whatever you roll over to the next year could be long-term savings, but whatever you spend can be necessary spending.

They key here is still to try to save as much as you can. So, if it’s at all possible to save 20% of your income after these pre-tax deductions are taken out, go for it.

Consider using Personal Capital

I’m a big fan of Personal Capital’s free financial dashboard. Connect your checking accounts and credit cards, and it automatically tracks all your spending. You can also connect your retirement and other investment accounts. It will analyze your investments for you and analyze whether you are on track to retire.

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.

Try Personal Capital For Free

Learn More: 22 of the Best Tools to Manage Your Money (Most Are Totally FREE)

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 destructive 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.

Author Bio

Total Articles: 1081
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.

Article comments

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

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.

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!

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.

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!

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.

Neil Crawford says:

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

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.

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!

Marshell says:

I didn’t get very far into this when I read something that didn’t make sense to me. If this is based on after tax money, which most would consider your tax home pay, why is your 401k contribution part of the 20% savings?

Rob Berger says:

Marshell, it’s based on after-tax income, not take home pay.

Lesley says:

In the UK your after tax income is your take home pay

Amanda says:

My confusion, related to this, is that 401k contributions are pre-tax, but are being compared to after-tax pay when included in the “savings” bucket. What I did was add my 401k contributions and employer match to my after-tax pay to get my total. It gave me a ballpark number at least.

Rob Berger says:

Amanda, thanks for sharing this tip. It sounds like a great way to use the 50-20-30 budget.

Carol Lepp says:

Rob, I need a lot of help and would like to get some advice from you/work out my budget with you. Would you be willing to guide me? I am giving you my work email so I will not be available at that address until tomorrow. Please consider helping me. I would really appreciate it.

Thank you so much,

Rob Berger says:

Carol, I’d be happy to help you, but I am completely booked with work through June. Feel free to reach out to me in July if you still need some help.

Steven says:

Great item! I’m still a student (Finance) and i’m already planning forward my idea of spending my money in the three categories. My example is at 49% Needs, 18% Wants (includes a second-hand car) and 32% Savings (Emergency fund, Investing and a Buffer for other costs ). I always have been interested in numbers and different prices and I always will be. I’m from the Netherlands where the net income (approx €1.800 net/month for a starter) is lower than in the United States so it was quite hard to tweak the categories to make it as it is now. I’m happy with the result so far even though i’m not working yet.

So now I know what I can do with a start salary after my studies without the worries of spending too much! More people should do it! Great site btw! Keep it going!

Jan says:

I am one of those ‘cheap’ people – except when it comes to my kids. My parents were ‘cheap’ too. They grew up during the depression and had parents that were out of work. My mom remembers her dad walking 11 miles one way because he heard of a job. But they never considered themselves ‘poor’ because they had the necessities. My dad fixed things that broke – didn’t throw them out & replace them; picked up nails off the street, sanded & straightened them. After WWII there weren’t an abundant supply of materials. Generations since consider more & more things disposable. And we have become impatient – we want it NOW! The 50-20-30 rule is a good start, but many aren’t willing to forego the big SUV now for the freedom you describe or the freedom from worry when they retire.

Pat B. says:

Hi Rob,

I work in the public sector, and 10% of my gross income is automatically deducted pretax to my pension plan. Would you consider this 10% deduction already a part of my savings portion? Or should I disregard this, and save an additional 20%? Thanks in advance for your thoughts.

Rob Berger says:

Pat, while there’s no “right” or “wrong” answer here, I would want to save 20% apart from the pension because you have limited control over the pension (if it operates like most do).

Justin says:

Hey I am a recent College Graduate with Zero Student Loans. Working as a Business Analyst in Finance.. Can you please help me with a budget? I am looking for guidance

Lauretta says:

Hi Rob! What is the difference between after tax income and take home pay?

Lily says:

This is impossible. My husband works in the tech industry. There are no family housing options that would fit within this type of budget where we live We can’t move because there are no graduate degree level tech jobs in cheaper areas. Our only debt is student loans, which is a lot, but between student loan payments, our HSA, 401K, and savings, we meet the 20% most months. We spend much less than 30% on extras, though. I’m guessing most Americans spend more than 50% on necessities and less than 30% on extras. Either the cost of housing and healthcare must come down, or the 50% rule is completely unrealistic.

Joanna says:

“This is impossible. There are no… We can’t… We can’t… Either…or…. ” You have defined your present reality. Perhaps you might take a few deep breaths…relax, and allow facts from the rest of the country to seep in….keeping in mind that the price of labor in a given region generally is fairly commensurate with the price of housing in that area. This is not a surprise ! Having one child in northern CA, one child in southern CA, others close to me in Madison, and living in Mpls, I know that this is so: You choose to live where you live ! MN is full of tech people with graduate degrees, and they live in very fine houses, thank you very much. Breath deeply.

Joanna says:

Now that I’ve thought about it for a minute…it occurs to me that you are overwhelmed by attempting to do the dreaded TOO MUCH, i.e., everything at once, and so have driven yourself to distraction. (Or as I heard a young man say this morning about needing to pay down his debt, “feeling crazier than a sack of young owls.”) I’m working under the assumption that when younger you bought the Tooth Fairy Myth on Student Loans in Lieu of Work and now you have an exorbitant amount to pay back. That’s only my inference from all the drama. My humble suggestion would be to always keep the HSA funded (for now) ONLY up to that point needed to reach the deductible you are required to pay before your catastrophic care kicks in. Just for now, set aside ONLY a month or two of emergency living expenses. NO other savings. Put anything else you have saved onto the debt right away. As a temporary expediency, sell any vehicles/any other possessions that have payments or leases; use the proceeds to buy a Grampa car from a garage sale so you can get to work. [e.g., 75k miles, been sitting in the sun for 12 years, the rubber hoses and belts need replacing, 12 yrs old. Pay a reputable garage to test the oil to verify the engine condition, and check the tranny and mechanicals, etc.] So now you have a new car for maybe $2,500 with NO payments and no trouble. So you have a place to live, you’re keeping the water and electric paid, you have food, you have transportation, and you have health care. Don’t forget to pay your TERM life insurance, car ins., renter’s/house ins., long term disability.
In my opinion, you aren’t in a position to fund much of anything else. But I’m only guessing, given the depth and breadth of the drama. No restaurants. You take your lunch to work. No cable. (For less than the price of one MONTH of cable TV, you can get all the news, sports, talk, and music you could possibly imagine, with a full YEAR’s subscription to satellite radio.) You don’t need to pay $100/month for each of those iPhones either. You really can get a $40 throwaway for those purported emergency calls from the car you’re not supposed to be talking in anyway.. And one $30 house phone. Or a $35/ month cell phone. (But…but…but…)
Right now, were I you, I would not be saving or adding to retirement. FOCUS is the only thing that is going to keep you motivated to get you out of debt, because focus is the only way you’re going to gain significant headway. Personal finance is about 85% personal and about 15% dollars and sense. The personal psychology has to remain calm and stay MOTIVATED in order to keep hold of the sense. You’re not going to stay calm if you’re attempting to accomplish eight things at once. You can’t stay motivated if you don’t see some real progress. Choose one debt goal. PAY IT OFF AS SOON AS YOU CAN by giving up ALL other unnecessary things. Then you will feel in control because YOU WILL BE IN CONTROL. Then choose the next goal and PAY IT OFF AS SOON AS YOU CAN. You are a human being. You cannot do everything at once. Of course you need to pay minimums. But there are many things you do not need to spend money on at all, and there are many things you’ll be better able to pile huge sums of money into later — after your income is freed up because NONE of it is going to debt. Your debt is what’s holding you back. Financially. Psychologically. (And it’s probably even affecting your health.) Get rid of it. Even if you have to move to where the cost of living is less…But you may not need to, if you learn to breath, eliminate the unnecessary waaaaaahhnts, and FOCUS your resources.
I wish you the very best.

Gray says:

I don’t know where these people get these rules. A quick check of any facts-based news source will turn up articles showing that in most areas of the country, the disparity between housing and living costs, and wages, means this rule is a fantasy for all but the wealthier portions of the populace. To the poster who says it’s impossible: You are correct, that in many high-employment areas, housing costs are out of line with salaries. Don’t buy into the snide comments about “you choose where to live”. No, you go where the jobs are and those are rarely cheap areas. Tech folks in Minnesota, I don’t doubt, do okay, but I suspect that Minnesota probably hires more locally than nationally. If they were hiring from outside, the housing costs would go up.

For right now, I’d breathe. Ignore the people suggesting you cut out things you may not have in the first place, or who have no idea what you need for your life. Most of this advice is made for people who had salaries and housing costs that are now a distant memory, who live lives where they still get calls on the landline (which many Americans have ditched). Cell phones: a necessity, not a luxury – you probably don’t have a landline, I suspect, except for internet, and you use your smart phone to access work email, connect with coworkers via Slack etc., find directions, and get transit routes. I also suspect that unlike the poster, you know that iPhones (or your pick of Android phones) do not cost $100/month each, and that a $30 throwaway phone may not run the apps that you use to connect to coworkers and conduct business on. You may already not have a car, and you live in an area where anything costing $2500 is a fantasy or so old that it’s unlikely to pass emissions, and will then take up about the equivalent of a car payment monthly in repairs. Been there, done that. The well made ones that actually run at 12 years of age will cost! And term life insurance? I suspect that you get your life insurance through your employer.

Keep the 401 K, keep paying the loans and the HSA. You mention savings so I suspect you’re already putting aside something for the one-month salary. Enjoy the graduate degree and job you have worked so hard to get. Be sensible about your costs, (I suspect you bring lunch already). Don’t cut your life down to fit someone else’s narrow vision of what it ought to be. You’ll come out right in the end.

Don says:

Hi, I only make about 10k a year, but my car was paid cash an I saved 20% every month, an now I’m saving 54% every month! I think it’s very important to budget an to think of the future! I always economize my money an budget an am frugal! I always look to get discounts on anything usually I get 10% off everything! So that’s just more money that can be saved an invested! I always keep a security balance of 1000 in my checking account an have much more in my savings! But my main concern is my IRA! So I think of ways to put the most I’m able into it a year! You think it’s tough budgeting 50k or 40k, try 10k! Anything is possible if you put your mind to it! I’m also the one family turns to when they need to borrow money even though they make way more than I do! So moral of my story its not how much you make, its how much you keep that counts! Only 168 hours a week, usually 40 is spent working leaves 128 hours, 40 hours sleeping leaves 88 hours to do an get everything else done! But if you use your money an invest it, it grows exponetially! Very powerful stuff interest is! Have a good one!

Chance says:

I’m curious where giving would fit into the 50-20-30 rule?
I have committed to a 10% giving rate to my local church. Would I remove this amount from my take home pay and use the remaining 90% to split up the 50-20-30? I know I could do this any way I like…just curious if anyone has thought about this. I view giving the same way I view taxes…non-negotiable.

Melissa says:

Chance, I always include my charitable contributions in the 30 category. It is my choice to give money to charity and I feel that sacrificing meals out, or new clothes makes the donation that much more meaningful.

Kirsten Hanner says:

Hello Rob! I am currently only 19 and was wondering if this is a good plan to start with for my age. I’ve never thought of money in a organized state and now that I’m about to go through college I’m just realizing how much we actually spend and don’t really think about it. I’m just wondering if this is a good plan for the young adult group? Anyway, thanks for the post very good read!

Annie says:

I’m actually a grown up and always been spending most of my money. However this year we had laid offs in the company I work for and the position I worked in was cut out and I was offered (which I took) another job on ower level and with quite less pay and my income shrunk. So being in the situation I’m in now, I finally decided to take control of my finances. I like the idea of 50/30/20 rule but I am little bit confused since my necessities are actually adding up to more that 50 %. So does that then mean I have to shrink my budged from the 30 % of lifestyle choices in order to still save 20 %?
I’m of course hoping to find a higher paying job in the future, I’m only 37 so I still have a career ahead of me but for now I have to face the reality and try to get by with what I earn.
When it comes to lifestyle choices and necessities, I live in a city and commute to work every day which adds up on my transportation cost. On the other hand, since I see my situation and current earnings temporary situation, I don’t see the point of moving closer to my work place and that way only saving 100-200 because the rents are expensive near my work place also.
However my long term goal is to buy my own apartment and thus I am finally budgeting my income and expenses.
So thank you very much for your advise! I think this 50/20/30 rule is ideal starting point for me to clear out my debt, save and keep a track of my expenses although it won’t be exactly 50/20/30.

Stephanie Colestock says:

Hi, Annie, and thanks for your comment!

I’m glad to hear that you’re taking control of your finances and thinking about these important issues, especially in the midst of a less-than-ideal pay cut. This will be a process for you, but with dedication and enough determination, you can get to the point of saving as much as you want/need to.

Yes, getting your expenses down to that 50% threshold is ideal. Here’s an article that may help you evaluate your expenses: https://www.doughroller.net/smart-spending/how-to-develop-the-habit-of-spending-less-than-you-make/. Look into trimming your necessities– are any of them actually luxury expenses? Can you take public transportation to work instead of paying for parking/gas? Could you find a less expensive apartment to rent?

Look into cutting expenses such as your cell phone (https://www.doughroller.net/smart-spending/republic-wireless-and-other-mnvos-which-is-best-for-you/) and cable (https://www.doughroller.net/smart-spending/tips-for-cutting-the-cord/). Use a rewards credit card to earn some extra cash on the money you’re already spending, especially on groceries and gas. Maybe even consider a side hustle, if you have the interest and time. If it’s absolutely impossible to get the necessities below 50% of your income, get them as low as you can and adjust your savings accordingly. Pull from the lifestyle choices as much as possible — you may not have as much play money as you’d like, but you’ll be padding your savings for the more important things.

Yes, you’re still young at 37, but don’t forget: the most important factor in savings/retirement is compound interest. Putting money into immediate luxuries rather than letting it accrue interest for longer will have big effects on your savings. It would be far more beneficial to trim corners now, let that money grow in an interest-bearing account, and ride out the sacrifices until a better paying job comes around.

I hope you’ll stick around Dough Roller… we cover this sort of thing all the time and are always publishing articles on how to save a little extra cash or cut your expenses. With due diligence, you’ll be well on your way to 50/20/30 and eventual financial freedom.


Enmanuel says:

Thank you Rob,, keep it up. I like all your podcasts so far but this really rocked, got me thinking about what I am doing right now. Thank God I am not in a bad shape, financially speaking but I can do better and I will.

Zander says:

The 50/20/30 rule is an absolute fantasy for most of America’s population centers and most average peoples necessities are well beyond 50% of their income. For instance, in my town, a two bedroom apartment costs upward of $1000 per month, and those are the cheap ones in the suburbs 14 miles from downtown. The average salary is 48k per year, which is my salary, and just to pay for rent, utilities, cell phone, food, and my gym membership is over 50% of my net income. That doesn’t even include transportation. I drive a beater 15 year old car that I own outright and my only debt is student loans, but I don’t have enough to save even 10% each month.
For many of us, high cost of living and high government taxation mean we have to live paycheck to paycheck, and /or just live very meager. If that sounds like you, my suggestion is to try to get some freelance work online and save that where your salary is insufficient. You can do a variety of things as an independent contractor and make some extra cash to help give yourself a bit of a buffer. Other than that, just keep pushing forward.

Eve Kan says:

Love your article! Between me and my husband, I am the one who manage our finances. Happy to say that we are saving 65% of our income.

Christian Chiakulas says:

I agree that it’s a good starting point, but I think everyone needs some flexibility. I am personally not at a place where I can save/invest 20% every month, but I’ve been investing on an online real estate crowdfunding platform with only $100 a month and it’s been a great way to get my foot in the door.

I think a hard number like 20% can leave some people feeling discouraged so it’s better to set an achievable goal early. With real estate crowdfunding portals like American Homeowner Preservation, Fundrise, and Groundfloor, it’s pretty easy to just throw a bit of money in and earn some decent returns. Eventually I hope to be able to invest more every month, but, y’know, gotta start somewhere.

Ron says:

50/20/30 is a guideline, not a rule, so don’t sweat if you’re living below your means and still aren’t saving 20%.

Stacey says:

I would love to get your opinion on my situation!
I’m about to turn 30 and just started shopping to buy my first home.
My current situation is approx 46% to needs, 38% savings (as I’ve been saving for a down payment) 16% lifestyle. I live frugally, but I’m in an area where the cost of living is on the higher side.
In order for me to buy a 1+den to 2 bedroom apartment my numbers would change to approx 56% to needs, 27% savings, 17% lifestyle. It makes me nervous seeing the needs bucket go over 50%. You mentioned the 50/20/30 idea was a frame work, do you think my predicted numbers are decent compromises? (Btw, in my city if I was to keep renting and move apartments my rent would likely jump enough to equal these numbers anyways). I figure if I’m saving a bit less but it’s going towards paying off a mortgage that’s probably a smart trade?

Ron says:

The 50/30/20 Needs/Savings/Wants Rule is not a rule. It’s a guideline.

Richard Mann says:

I think a pet should go under the 50% pot.., the necessity pot.

Jeff says:

My biggest concern is this. Nowhere have I found does anyone mention daycare. I just sat down and figured our needs vs wants. Our daycare for the summer is 19.1% of our take home pay. he haven’t had a car payment in 6 years. Our newest car is 10 years old. We live in a 2 bedroom place for the 4 of us and that is costing us $950 per month which is 23% of our net income. Our kids share a room. Our needs consume 72% of our take home income. That includes the daycare. I have the cheapest auto insurance I can find. Our monthly wants such as internet, amazon, netflix account for only 5% of our net income. Someone please tell me what I can be doing differently. Rent and daycare alone account for 42% of our net income.

Ron says:

(I know this is two years after the fact.)
Daycare is a Need because you need to have your child(ren) taken care of.
Have you run the numbers on how your budget would change if the one of you with the lowest income quit and became a homemaker (with possibly a part time job)? Sure, your income would drop, but so would expenses. Maybe it would make things worse, but OTOH maybe it would be better via ripple effects like lower food costs through less take out, etc.

Ron says:

I calculate Needs/Wants/Savings net of taxes (because 401(k) contribs *are* savings), and I split my HSA contribs between Needs (for medicines) and Savings.
Also, the money I “save” for vacations, a new car, gifts, etc go in the Wants bucket because they’re really sinking funds. Only retirement and Reserve funds are counted as savings.