The 50, 30, 20 budget rule is a basic, yet reliable plan for building a balanced budget that prioritizes personal savings. 50% of your post-tax income goes to your needs, 30% goes to your wants, and 20% goes to savings.
The 50/30/20 plan was first popularized in the personal finance book:
All Your Worth: Ultimate Lifetime Money Plan.
Basically, the plan is a reasonable and simple way to manage your personal finances. As Investopedia says:
- The 50-20-30 (or 50-30-20) budget rule is an intuitive and simple plan to help people reach their financial goals.
- The rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do.
- The remaining half should be split up between 20% savings and debt repayment and 30% for everything else that you might want.
- The rule is a template that is intended to help individuals manage their money and save for emergencies and retirement.
50% for Needs
The 50% for needs include those things that are necessary for survival. Not leisure. That would include housing, transportation, work necessities, groceries, and basic utilities. HBO, Netflix, and expensive phone plans are not needs.
30% for Wants
30% of your budget is planned for wants. This includes everything that makes life leisurely. A want is optional. The key here is to enjoy life, but know that 30% of your budget could disappear and you wouldn’t be hurting for survival. Here is a list of possible wants that you could spend the 30% on:
- A new phone
- New bags or accessories from Amazon
- Going out to dinner instead of cooking at home
- Working out a gym instead of doing pushups and jogging at home
- Buying a new car with leather seats instead of a preowned value-based car
20% for Savings
This column in your 50/30/20 Budget Plan is essential. Where your 30% for wants could disappear, you should prioritize the 20% for savings ahead of your wants. This includes paying off debts, saving cash, and investing for retirement or in a Health Savings Account.