Budgeting doesn’t have to be difficult or take up a lot of your day. In actuality, the simplest budgeting methods are frequently the best. Consider the 50/30/20 rule as an example. The 50/30/20 rule is an easy monthly budgeting technique that outlines exactly how much you should allocate to savings and living expenses each month.

You can safely avoid overpaying and gradually increase your savings with a clear big-picture overview of your monthly budget—all without meticulously keeping track of each and every purchase.

So, you might want to try the 50/30/20 strategy if you’ve ever downloaded a budgeting software only to delete it after three days. Here’s how it works—one it’s of the greatest budgeting advice we’ve come across.

Understanding the 50-30 20 Budget Rule

The 50/30/20 rule is a simple budgeting technique that can assist you in managing your money in an efficient, straightforward, and sustainable manner. The general rule of thumb is to allocate 50% of your monthly after-tax income for needs, 30% for wants, and 20% for savings or debt repayment.

You may make better use of your money by consistently maintaining a balance between three key areas of expenditure. You can also save yourself the time and frustration of going into the specifics every time you spend by keeping track of only the three main categories.

Why can’t I save more is a common query when it comes to budgeting. That age-old conundrum can be resolved and your spending habits can be made more structured by using the 50/30/20 guideline. Whether you’re trying to pay off debt or save money for a rainy day, it might make it simpler for you to achieve your financial objectives.

50%: Needs

Needs are the expenses you definitely must pay and the goods you need to survive. These consist of minimum debt payments, utilities, groceries, insurance, car payments, rent or mortgage payments, and insurance and health care. Your “must-haves” are those. Extras like HBO, Netflix, Starbucks, and eating out are not included in the “needs” category.

Your demands and obligations should be met with just half of your after-tax income. If your necessities are costing more than that, you will need to either reduce your wants or try to downsize your lifestyle—perhaps to a smaller home or modest car—by cutting back on other expenses. Perhaps commuting in a carpool, using public transit, or cooking more frequently at home are solutions.

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30%: Wants

All the items you purchase that are not absolutely necessary are considered wants. This includes going out to eat and see a movie, that new handbag, athletic event tickets, trips, the newest electronic device, and ultra-high-speed Internet. If you boil it down, everything in the “wants” category is optional. Instead of visiting a gym, you can work out at home, prepare meals at home, or watch sports on television rather than purchasing tickets to an event.

This category also includes the decisions you make when upgrading, such as choosing a more expensive steak over a cheaper hamburger, purchasing a Mercedes over a Honda, or deciding between viewing TV for free with an antenna or paying for cable. In essence, wants are all the small extras you purchase to enhance your quality of life.

Why can’t I save more is a common query when it comes to budgeting. That age-old conundrum can be resolved and your spending habits can be made more structured by using the 50/30/20 guideline. Whether you’re trying to pay off debt or save money for a rainy day, it might make it simpler for you to achieve your financial objectives.

20%: Savings

Lastly, make an effort to set aside 20% of your net income for investments and savings. This includes making IRA contributions to a mutual fund account, investing in the stock market, and adding money to an emergency fund in a bank savings account. In case you lose your job or experience an unexpected incident, you should have at least three months’ worth of emergency savings on hand. After that, concentrate on retiring and achieving future financial objectives.

Savings are important

The 50-20-30 rule is designed to assist people in managing their after-tax income, primarily so that they have money set aside for emergencies and retirement savings. Establishing an emergency fund should be a top priority for every household in case of job losses, unanticipated medical costs, or any other unforeseen financial costs. If a household uses its emergency money, it should concentrate on replacing it.

As people live longer, saving for retirement is also a crucial step. The key to a comfortable retirement is to estimate how much money you’ll need in retirement and start saving early.

The 50/30/20 rule: where did it come from?

The “All Your Worth: The Ultimate Lifetime Money Plan” book from 2005, authored by current US Senator Elizabeth Warren and her daughter Amelia Warren Tyagi, is where the 50/30/20 rule first appeared.

Warren and Tyagi draw the conclusion that you don’t require a complex budget to keep your money under control based on more than 20 years of research. The 50/30/20 guideline will help you manage your spending between your needs, wants, and savings goals.

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How to apply the 50/30/20 rule: a step-by-step guide

So how do you apply the 50/30/20 guideline in practice? You must compute the 50/30/20 ratio depending on your income and categorize your expenditures in order to put this straightforward budgeting concept into practice. This is how:

Calculate your after-tax income

The 50/30/20 budgeting rule requires you to first determine your after-tax income. Your monthly income as a freelancer, less your business expenses and the amount you’ve set up for taxes, will be your after-tax income.

This will be simpler if you have a consistent job and a paycheck. See how much money is deposited into your bank account each month by looking at your payslip. If payments for pension funds or health insurance are automatically taken out of your salary, add them back in.

 Categorize your spending for the past month

You must examine how and where you spent your income during the previous month in order to get a complete picture of where your money is spent each month. Take a look at a copy of your 30-day bank statement, or just use the Insights function in your N26 app. All of your transactions are automatically categorized into subcategories like salary, groceries, entertainment, and more.

Divide all of your spending into the following three groups: needs, wants, and savings. Keep in mind that a need is a cost you absolutely must have, like rent. A want is an extra luxury that you could do without, like going out to eat. Savings include extra debt payments, pension fund contributions in retirement, and money set aside for emergencies.

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Evaluate and adjust your spending to match the 50/30/20 rule 

You can begin to modify your budget to adhere to the 50/30/20 rule once you have an understanding of how much of your income is allocated each month to requirements, wants, and savings. The easiest method to do this is to evaluate how much money you spend each month on wants.

A wish is not extravagant, in accordance with the 50/30/20 guideline; rather, it is a fundamental nicety that enables you to enjoy life. It’s better to figure out which of your wants you can cut down on to keep within 30% of your take-home pay because cutting back on your needs might be a difficult and complex undertaking. The more you cut back on your wants, the more likely you are to reach your 20% savings goal.

What experts say about the 50/30/20 rule

This spending plan might not work for everyone, concurs Greg McBride, CFA, chief financial expert at Bankrate.

Because of their high housing, insurance, and child care expenditures, which are already considerably above 50% of net income, McBride warns that many households may find it difficult to adopt the 50/30/20 budget. “In any case, start with the savings component by automating contributions to your emergency fund and retirement plans through payroll deduction or automatic bank transfer, and aim to grow the amount you’re saving with each pay raise and every debt you pay off.”

According to Chloe Moore, CFP, founder of Financial Staples, a financial planning company, the 50/20/30 guideline is very simple, but it could take effort to distinguish between wants and requirements.

It can be daunting or complicated to think about creating a budget. This technique offers a rather simple guideline, according to Moore. You can compare your approach to our present expenditure and savings to determine how well it works. It might be challenging to separate wishes from necessities because these concepts are highly individualized. Food is an example of a necessity. Some groceries could be considered necessities, whilst other goods or eating out might be wants.

Is the 50/30/20 rule budget right for you?

A straightforward budgeting technique known as the 50/30/20 rule can do away with the requirement to develop a thorough budget with specific spending amounts and a dozen or more line items. Additionally, it gives you a foundation for decision-making around your finances.

For people with extremely low or high salaries, the 50/30/20 rule could not apply. For instance, minimum-wage workers may have to spend a larger portion of their income on requirements, leaving them with less money for wants and savings, as opposed to highly compensated executives who earn $1 million annually and may not need to spend $40,000 a month on necessities.


Saving is challenging, and life frequently presents us with unforeseen costs. Individuals have a plan for how they should manage their after-tax income by adhering to the 50-20-30 guideline. If they discover that they spend more than 20% of their income on wants, they can identify strategies to lower those costs so that money can be allocated to more crucial areas, such as retirement and emergency funds.

Although it is not advised to live like a Spartan, life should be enjoyed, having a plan and following it will enable you to pay for your expenditures, save for retirement, while also engaging in the activities that bring you joy.

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