50-30-20 Budget: Understanding How It Works

Updated on August 11, 2022

Are you trapped with your neverending payables? 

Do you want to overcome the struggle of working overtime everyday yet no savings left after every paycheck? 

Why don’t you try fixing your budget? 

Budgeting is the number one solution, and it has various options. 50-30-20 Budget is the top choice by many, and I can testify its effectiveness. 

Do you want to try it? But first, let’s understand how the 50-30-20 budget works. 

What is the 50-30-20 Budgeting Rule?

The budgeting system of the 50-30-20 rule of thumb is about your spending percentages. It follows a simple rule by planning your budgets with three major categories. 

Needs – 50%

It includes your life essentials. You allot 50% of your budget for your survival. The mandatory expenses are as follows:

  • Foods
  • Housing (rent or mortgage payments)
  • Utility (water, electricity, and others)
  • Gasoline
  • Insurance
  • Child support
  • Medical needs

Wants – 30%

30% of your budget is for flexible spendings. These are the things you want, but you could live without them in reality. It all depends on what makes you feel happy and your lifestyle choice. The discretionary expenses are the following. 

  • Eating out
  • Gym membership
  • Entertainment (movies, games)
  • Travel
  • Online subscriptions (streaming, music)
  • Shopping (clothing, accessories, gadgets, and others)
  • Home decoration

Savings – 20%

The remaining 20% of your net income goes to your saving account. You may also allocate it to paying off your debt or credit card. Set aside the last percentage for: 

  • Credit card payments
  • Monthly car loan payments
  • Student loans
  • Retirement savings
  • Emergency fund 

Excellent how this simple rule can manage your finances effortlessly. Are you wondering how it all began? 

History of 50-30-20 Budget Rule

The 50-30-20 budgeting started because of Elizabeth Warren and Amelia Tyagi. They introduced this saving and spending strategy in 2005. They co-authored the book entitled “All Your Worth: The Ultimate Lifetime Money Plan.” 

The book focused on budgeting rules for readers to manage their money wisely. It serves as a blueprint for dividing your mandatory spending, flexible expenses, savings, and debt repayment. The book serves as a guide not to spend too much on a single category. 

Can you believe how 50-30-20 is introduced? All thanks to that book. But before you go and proceed with this technique, let us lay out its pros and cons first. 

Advantages of the 50-30-20 Budget

The majority of the people chose this budgeting strategy for a reason. 

Easy and simple

Budget 50-30-20 is uncomplicated. All you have to do is allocate your money into three big categories. Stay on track every paycheck to reach your financial goal. 

Best plan

Young people today lose sight of planning when it comes to finances. They focus on how to spend their earnings rather than saving. Knowing 50-30-20 and applying it in real life is the preeminent you can do. 


The 50-30-20 is just a preference. It could be 45-25-30. Base your ratio on your financial status. Adjust it to fit your income after tax, short, and long-term plans. With this, you can manage your money more and still save for your future. 

Magnificent, isn’t it? It is such a trouble-free budget rule. But hey! There’s nothing perfect in this world. Know what is the downside of it.

Disadvantages of the 50-30-20 Budget

The 50-30-20 budget has the perks of utilizing this as a budget plan. However, there are still cons you have to know. 

Not applicable to all

Budgeting with 50-30-20 does not work for all levels of income.

Students and junior employees need more funds for their needs. Around 80% of their allowance and payout goes in there. Therefore, they have a lower percentage left for savings and shopping. 

Many people also spend 40-50% of their paycheck paying off their debts and cut their living expenses. It fits those who plan to buy a house or a new car. 20% saving is too small or no meaning at all. 

Furthermore, young professionals are typically not realistic. They do plan a budget; however, they do not meet it. They set it beforehand but fails to follow the three categories. In the end, they fail to utilize this budget properly. 

Don’t be discouraged. Remember, the achievement of your budgeting technique depends on you. Assess yourself if you can allot the percentage correctly in your budget. Most importantly, learn how to use budgeting properly. 

Tips When Using the 50-30-20 Budgeting Rule

Overcome your financial struggle with the 50-30-20 rule of budget. Follow these tips below.

Calculate your monthly after-tax income

It is essential to check how much is left for you after the taxes. It helps you to know the actual amount available to spend each month. 

Read your pay stubs for the after-tax income for employees with a steady paycheck. Look for deductions like health care and retirement contributions. If there are deductions, add them back in. 

For self-employed, your after-tax income is equal to your monthly gross income. Make sure to deduct your business expenses and taxes. However, if your income fluctuates, you need to take an average over several months. It helps identify your monthly take-home pay. 

Budget 50% for needs

Assess your monthly spending and your mandatory expenses. Look for any payment you can’t skip without severely impacting your life quality. 

Also, include minimum payment on any debt or loan repayment to legal lenders like bedok money lender. Keep in mind that failure to repay affects your credit score negatively. And paying on time to licensed lenders like lucky plaza money lender can greatly impact your credit score positively.

Budget 30% for wants

After listing down your needs, the remaining spending goes to your wants. Be careful when determining your wants and needs – it is quite tricky. Your “wants” might be a “need” for others and the other way around. 

Budget 20% for Savings and Debt

Spend at least 20% of your after-tax income for saving money and debt repayment. However, if you have a lot of debt, most of your 20% goes to repaying debts. Continuously pay until you fully pay it off. When this happens, you’ll focus your 20% towards long-term savings. 

The 50-30-20 budget rule is a practical guide. It limits your spending and shifts you to more saving. Take note of these tips. Apply it with your monthly budget plan. 

The 50-30-20 budget seems easy. If you follow it correctly and maintain financial momentum, it’s possible. Just bear in mind the pros and cons, and for sure, you can have a brighter bank account in the future. 

The Editorial Team at Healthcare Business Today is made up of skilled healthcare writers and experts, led by our managing editor, Daniel Casciato, who has over 25 years of experience in healthcare writing. Since 1998, we have produced compelling and informative content for numerous publications, establishing ourselves as a trusted resource for health and wellness information. We offer readers access to fresh health, medicine, science, and technology developments and the latest in patient news, emphasizing how these developments affect our lives.