Understanding the 50/20/30 Rule: Our Easy-to-Follow Guide

Figuring out and sticking to a budget isn’t super fun for most people, but it certainly is a smart way to handle your money.

The 50/20/30 rule is one of many budgeting plans that help us get spending under control. This plan works well for households where no more than 50% of the money coming in is spent on living expenses. As housing prices rise across the country, this is becoming more difficult for many Americans.

The 50/20/30 budget plan was popularized by U.S. Sen. Elizabeth Warren of Massachusetts, a bankruptcy expert and creator of the Consumer Finance Protection Bureau, and her daughter, business executive Amelia Warren Tyagi, in their co-authored book, “All Your Worth: The Ultimate Lifetime Money Plan.”

The book was published in 2006, prior to the Great Recession and the housing bubble burst. Since that time, income inequality has risen, and recently inflation has gotten out of control.

How to Use the 50/20/30 Budget Plan

Using this budget plan isn’t particularly difficult but will require you to assess monthly expenses in comparison with household income. The goal of the 50/20/30 budget is to break down your monthly after-tax income and focus your spending in three broad categories: Essential living (50%), financial goals (20%) and personal spending (30%).

While this budgeting method might have worked for many middle-income families when it was published, the number of households it actually applies to is shrinking. However, if you live in that sweet spot, the 50/20/30 budget can still be a great strategy to implement.

Essential Living: 50%

With the 50/20/30 budget, you should spend 50% of your income on essential living expenses. These can include:

• Rent or mortgage
• Utilities
• Groceries
• Car insurance and/or car payments
• Phone and internet
• Gas for your work commute
• Credit card and loan minimum payments
• Other: Bills that are essential and probably no fun at all. Examples include prescription medicine or daycare costs.

Let’s take a closer look at these numbers and see just why they can be so unrealistic for so many people.

The average American brought in $1,070/week in the third quarter of 2022 That averages out to about $55,650/year, or about $4,637/month before taxes.

According to Realtor.com, the average rent in October 2022 was $1,734/month across the top 50 metro areas. According to the USDA, a thrifty family of four can currently expect to pay over $967.70/month for groceries. These two expenses alone push you well above the 50% threshold for essential living expenses.

So if you have utilities? Car payments? Insurance or phone bills? If you’re the average American household — or, heaven forbid, lower-income — you can forget about it. The 50/20/30 budget won’t work for you because your basic expenses take up more than 50% of your take-home pay.

Financial Goals: 20%

Let’s say you are lucky enough to have your basic expenses account for 50% or less of your monthly take-home pay. You’d then want to look at your financial goals, allocating another 20% of your monthly budget to the cause.

Financial goals can include things like:

• Investments: This includes your 401(k) and all other investments. Don’t have any yet? It’s never too late to start investing.
• Savings: One of the biggest steps to financial health is having emergency savings so you don’t step backward every time an unexpected expense pops up.
• Debt-reduction payments: This is for payments on your credit cards, student loans and any other debts that are above the minimum payment.

Personal Spending: 30%

This is the category that makes this budget work for the budget-averse — when they have a high enough income, that is.

Personal spending is all of the stuff you like to spend money on but don’t really need. And at 30% of your monthly income, that can mean a lot of freedom. These expenses can include things like:

• Dining out
• Vacations
• Going out for movies or drinks
• Netflix and other in-home entertainment options
• Shopping for clothes, decor, etc.

Now, here’s where you have to get careful at higher income levels. Let’s say both you and your spouse pull in $200,000/year each. That makes your monthly household income about $33,333/month.

That means 30% of your monthly budget would be $11,111.

Could you spend that much on personal spending every month?

Maybe.

But odds are you’d really have to try. For high-income households, you’re probably going to want to readjust your percentages so they’re more oriented towards your financial goals rather than pursuing lavish expenses every single month.

Getting to a place where the 50/20/30 rule could work

Most people don’t fit into the 50/20/30 budget because their income is too low and their essential expenses are too high. If you find yourself in this boat, here are some things that can help on the saving money side:

• Explore ways to save money by trimming the fat off of your basic expenses and discretionary spending.
• Utilize apps that help you save money automatically.
• Learn about innovative ways to lower your grocery bill.
• Educate yourself on ways to combat inflated prices on items like used cars or gasoline.
• In some states, you can shop around for utility providers to get the most competitive price on your bill.
• Check to see if you qualify for free or discounted internet service.

And here are some ways you can side hustle to increase your income:

• Make up to $500 to share your opinion.
• Get paid $15-$20 by starting your own laundry business.
• Rent out your pool for up to $135/hour.
• Make a five- to six-figure income flipping sneakers.
• Turn your second language into a side hustle.
• Capitalize in the uptick of weddings by starting one of these matrimonial gigs.

When the 50/20/30 Budget Works

This method works well for those within certain income limits who are new to budgeting, or are put off by rigid spreadsheets.

Splitting your expenses into these three broad categories will get you thinking about the value of your purchases, while providing flexibility as you find your frugal footing.

And by building discretionary spending into your financial plan, you’ll be able to enjoy what’s most important to you while you find places to cut spending.

When the 50/20/30 Budget Doesn’t Work

For some, the numbers simply won’t add up.

Maybe you have two jobs and still can’t earn double the price of rent in your area. Maybe your daycare options are limited. Or maybe your student loan debt eats up most of your paycheck.

For others, you may need to adjust the percentages if you make so much money that 30% on personal spending would be ridiculous.

If the 50/20/30 budget isn’t for you, that’s OK.

There are plenty of other budgeting methods to choose from:

• Zero-based budgeting
• Envelope budgeting
• Bare-bones budgeting
• Bullet journal budgeting
• Kakeibo
• Calendar budgeting
• Half-payment method
• Paycheck budgeting

What’s most important is that you zero in on eliminating debt and growing your personal wealth, regardless of the budgeting method you choose to use.

Pittsburgh-based writer Brynne Conroy is the founder of the Femme Frugality blog and the author of “The Feminist Financial Handbook.” She is a regular contributor to The Penny Hoarder. Former Penny Hoarder writer Tyler Omoth contributed to this report. 

This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.