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Budgeting Basics: The 50/30/20 Rule

If you’ve never made a budget before, it can be intimidating to get started. Don’t worry, we have a simple rule of thumb for you to follow if you want to manage your spending a little more closely.

While everyone is different, accepted financial wisdom suggests that individuals should spend roughly 50% of net income (that’s your take home pay) on "Needs," 30% on "Wants," and 20% on Savings or Debt Reduction.

Let’s look at an example:

If your monthly take home pay is $5,000, your 50/30/20 plan would look like this:

  • Needs (50%): $2,500

  • Wants (30%): $1,500

  • Savings/Debt (20%): $1,000

Now let’s explore what each of these categories means...

Use 50% of your income on “Needs”

Oh, necessities. Can’t live without them. This category includes your basic living needs each month such as housing (rent or mortgage), groceries (not restaurant meals), transportation, bills & utilities, debt payments (minimums only), and insurance.

Think about what these necessities are for you and write them all down—we promise it should only take a few minutes! If you add them all up and they make up more than 50% of your monthly take home pay, you can try to find ways to reduce what you’re currently paying. And we have plenty of creative ways for you to do so! Another option is to dip into the next category.

Allow 30% of your income on “Wants”

In the 50/30/20 rule, the 30% really is the life of the party. "Wants" are, as you may have guessed, items that are non-essential. It can be helpful to allow some room in your budget for things that simply make you happy!

For example, you may want to order takeout after a long day instead of cooking dinner. Maybe you want to book a weekend getaway. This also could include subscriptions like Netflix and Spotify.

You are the sole decision-maker for these expenses. Therefore, you can be flexible here in terms of what you choose to splurge on and where you hold back.

Commit 20% of your income to Savings and Debt Reduction

Good 'ole 20%. This category is like that responsible friend in the group who may not be the most exciting, but you're glad they're around when the night goes sideways.

Savings may mean putting funds aside for an emergency (highly recommended!), a specific goal or life event, or your retirement.

When we say Debt Reduction, we’re talking about any extra payments you could make toward your credit card or student loan on top of the minimum payment (which is included in the “Needs” category).

This can be harder to plan for, as you must look at the bigger picture, consider the future, and expect some unexpected expenses.

The Bottom Line

As we mentioned, everyone is different, and it’s important to keep in mind that your priorities can will shift over time. Use the 50/30/20 rule as a baseline but remember to be mindful of what it is you really need and want. Often, you’ll find that the thing you absolutely needed six months ago wasn’t quite so essential.

That said, don’t beat yourself up if you don’t hit that savings target every month. We get it—life happens! Take that opportunity to spend a minute checking in with your wants and adjust accordingly.

Future You will thank you.

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