What Is the 50/30/20 Rule?

Setting your own budget can be intimidating, especially if you’ve never sat down and written one out before, but there’s a great place to start: the 50/30/20 Rule. But what IS it? The 50/30/20 Rule is really a guideline to help categorize your budget to ensure you’re allocating enough of your money to cover the things you need for short-term and long-term stability.
50% Needs
These are your non-negotiables. They look just a little different depending on your lifestyle, but these are your recurring bills and expenses that don’t vary much from month to month. They can include, but aren’t limited to:
- Rent/mortgage
- Electricity
- Car payment
- Car insurance
- MBTA LinkPass
- Phone bill
- Student loan payment
- Groceries
- Health insurance
- Dental insurance
You need a place to live, you need food to eat, and you need to pay your utility bills. These come first and set the line for how much you have to allocate to the rest of your budget.
30% Wants
Realistically, you’re going to need to budget for the “wants” of your life. Going out to eat with friends, seeing a movie, date night, concerts, etc. Having a specific limit set aside for your negotiables makes it easier to stick to your budget and not go overboard on any one purchase. This is also the section that covers the “wants” that feel like “needs”: clothes, shoes, dining out…those can be planned for and rescheduled. True “needs” can’t be rescheduled that easily.
20% Savings
Last in size, but not in importance, is your savings. For the benefit of your long-term financial security and future well-being, prioritize this bucket of your budget. An emergency fund can protect you from unforeseen financial burdens, and retirement funds protect your quality of life in your later years. It might not feel like you’re contributing much now, but with time on your side, this is one of the most important parts of your budget. Every bit that you can set aside now in retirement funds makes a much bigger impact in the long term, thanks to the power of compounding interest.
The 50/30/20 “Rule” isn’t a perfect fit for everyone, but it’s a solid starting point to get you on the right path. If you aren’t spending 50% of your after-tax income on bills and other “needs” you can absolutely allocate more money to your savings. If you’d like to take some of your “wants” money and put it into investments in addition to what you’re already doing with your 20% savings money, go for it!
And don’t forget that Jeanne D’Arc is here to help! We can sit down with you to help you create a custom budget to fit your specific situation. You can also check out the resources available for free from our partner, GreenPath Financial Wellness.