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Home Blog What is the 50/30/20 Rule?

What is the 50/30/20 Rule?

What is the 50/30/20 Rule?

Humans are fallible—sometimes we just need guidelines. If you struggle making sense of a sea of budgeting systems and apps, consider the 50/30/20 rule. The 50/30/20 rule states that your after-tax income should be roughly divided three ways:

  • 50% to needs
  • 30% to wants
  • 20% to long-term savings

The 50/30/20 rule is not gospel and it's not a law. It's a guard rail around your spending and savings decisions. Here's a tool to help you see how much of your monthly income should be used in each category according to the rule:


The beauty of the rule is its simplicity. We humans are imperfect, and one of our greatest weaknesses is our tendency to bail when things get complicated or stressful. Budgeting is something you must do your entire life, so why not try this approach to simplify it! Let's look at each portion:

People define their needs in vastly different ways, however, there are several things we can easily agree on: housing, utilities, many kinds of insurance, and transportation.

Examples of needs

  • Housing: Rent, mortgage, homeowners insurance, property taxes
  • Transportation: Car payment, insurance, gas, public transport passes, parking
  • Short- to mid-term savings goals: Down payment on a car, a new roof, replacement furnace
  • Health care: Insurance premiums, deductibles, prescriptions
  • Insurance: Auto, life, home, health
  • Utilities: Gas, water, electricity, internet, cell phone
  • Loan payments: Credit card debt, student loans

Note that the necessities come in two flavors: routine bills and predictable goals. Some expenses you will pay regularly, and others (like a new roof), you must anticipate and set money aside. Caution: It's easy to fool yourself into thinking you need a five-bedroom house. Realize that spending too much from one category will rob the others. In short, be honest with yourself about your needs.

While the necessities are easy to agree on, wants are subjective and personal. A vacation Jack considers valuable—essential, even—Jill finds frivolous and wasteful. The 50/30/20 rule encourages you to be explicit about your wants. But don't beat yourself up over them. Give yourself permission—within a reasonable set of constraints—to spend some of your money on things that make your life enjoyable.

Examples of wants

  • Gym memberships
  • Clothing
  • Online subscriptions
  • Furniture
  • Vacations
  • Hobbies
  • Eating out

If you squint, you'll see similarities between your wants and needs. Clothing, for example, is a necessity. The truth, however, is that most people can clothe themselves inexpensively; the majority of spending on new threads is at the margin, where it becomes plainly a want. Again, be honest with yourself.

There is no financial habit—especially for young adults—as important as saving. Unsurprisingly, it's also the hardest. To save is to delay gratification. Make the decision today, whether you follow the 50/30/20 rule or not, to save a significant portion of your income for:

  • Rainy Days
  • Retirement

The former is hard because, with our money, we're optimists. What could go wrong? Retirement, on the other hand, is difficult because it can seem so distant. (Surely I can save for retirement when I get a better job, right?)

First, for emergencies, set aside a portion of your income in a savings account. A savings account will psychologically earmark your money, making it less likely you'll withdraw it for spurious reasons. With a little protection in place, if disaster strikes, you can still transfer the funds to a spending account easily enough.

One of the great secrets to saving is finding ways to make it automatic. Don't put yourself in the position of deciding how much to save with each paycheck. Make the savings decision once, and ride it as long as possible. You can do this with auto transfer! Click here to find out how to schedule a transfer within your Online Banking. (Scroll down to the 8th question in the Online Banking Help Guide.)

If you own a home, pay your mortgage online via Bill Pay, and set the amount higher than what's required. Two benefits accrue to paying extra: 1) you'll sidestep large amounts of interest, and 2) equity in your home is a form of retirement savings: you will expedite the day when you have no payment at all.

Contribute as much as you can to a 401(k) or individual retirement account (IRA). If you're employed, it's possible your employer offers a 401(k) and maybe even matches some of your contribution. If your employer matches 3%, for example, make sure you contribute at least 3%. Otherwise, you're leaving money on the table. But don't stop there; contribute much more money where possible.

Some employers, if they support direct deposit, will let you split your paycheck between accounts. This payment method is also a nice way to put money into a savings account automatically.

Make Adjustments
Like all budgeting methods, the 50/30/20 rule is not perfect, and shouldn't be applied as defined to every budget. Saving 20% is a huge improvement for some people. For others it's low. If you're a high-income earner, for example, you should consider saving (and investing) much more than 20%, especially if you intend to travel. On the other hand, if you barely make ends meet (which is fine, we all go through it!), consider spending less than 30% on wants. Resist the temptation to compare yourself to others. Make adjustments. Place an emphasis on your long-term goals.

The 50/30/20 rule is a simple, practical rule of thumb. If budgeting isn't natural to you, the 50/30/20 rule gives you permission to relax a bit and put savings on autopilot. Ready to get started? Click here for more information about savings account options to deposit 20% of your money into. Happy saving!

Article content provided by Banzai.


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