A monthly budget is one of those financial necessities that no one wants to think about, yet everyone should. But figuring out how to allocate your money can be tricky. The 50/20/30 rule breaks it down simply: 50 percent to necessities, 20 percent to financial goals, and 30 percent to lifestyle.
How It Works
First, a quick PSA: If you don’t already have a monthly budget, time to start one. The 50/20/30 rule makes it easy. With this rule, the first 50 percent of your take-home pay goes toward necessities, such as rent or mortgage payments, utilities, loan payments, and tuition. Some people include food, clothing, and transportation in this bucket; others consider those to be lifestyle choices — the way you categorize them is up to you.
The next 20 percent of your take-home pay should go toward savings and debt, or financial goals, including paying down credit-card debt, saving for retirement, building an emergency fund, or saving up for a vacation.
According to this rule, the last 30 percent of your income is devoted to wants, otherwise known as lifestyle choices. These are typically expenses that can vary by month and over which you have some control. These can include shopping, entertainment, gym fees, hobbies, and pet expenses, plus food, clothing, and transportation if you didn’t include them in your necessities.
Is It for Everyone?
The 50-20-30 rule was first popularized by Senator Elizabeth Warren and her daughter Amelia Warren Tyagi in their book “All Your Worth.” While no budgeting strategy is one-size-fits-all, experts say this is a good basic rule for getting started. Warren and Warren Tyagi call it the “balanced money formula,” and they explain that while there are times you might need to stray (if your income drops, you may need to give a higher percentage to necessities, for example), sticking to this rule of thumb should keep your finances generally healthy. Or, as the authors explain, it’s “the right place for most people most of the time, and it is a good place to aim for in your lifetime money plan.”