The 50/30/20 rule is a simple budgeting framework that divides your after-tax income into three categories: 50% for needs, 30% for wants, and 20% for savings and debt repayment.
50%
Needs
Essential expenses you can't avoid
30%
Wants
Non-essentials that improve life
20%
Savings
Future you will thank present you
Understanding the 50/30/20 Budget Categories
50% - Needs (Essential Expenses)
These are expenses you absolutely must pay to live:
- Rent or mortgage payments
- Utilities (electricity, water, gas, internet)
- Groceries (not dining out)
- Transportation (car payment, gas, public transit)
- Health insurance and medical expenses
- Minimum debt payments
- Childcare (if required for work)
30% - Wants (Lifestyle Choices)
These make life enjoyable but aren't essential:
- Dining out and entertainment
- Streaming services and subscriptions
- Shopping and hobbies
- Travel and vacations
- Gym memberships
- Upgraded phone plans
20% - Savings & Debt Repayment
This is how you build wealth:
- Emergency fund (3-6 months expenses)
- 401(k) and IRA contributions
- Extra debt payments (beyond minimums)
- Investment accounts
- Saving for goals (house, car, vacation)
📊 Example: $5,000 Monthly Income
- Needs (50%): $2,500 → rent, utilities, groceries, car
- Wants (30%): $1,500 → dining, entertainment, hobbies
- Savings (20%): $1,000 → 401(k), emergency fund
When to Adjust the 50/30/20 Rule
The 50/30/20 rule is flexible. Consider adjusting if:
- High cost-of-living area: Try 60/20/20
- Aggressive debt payoff: Try 50/20/30
- Low income: Focus on needs first, any savings is progress
- High income: Try 50/20/30 to build wealth faster