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Your Ultimate Budget Guideline: The 50/20/30 Rule

Laura Shin
Laura Shin
Posted on Oct 3, 2012

When it comes to our money, there is no shortage of ways we could spend it: food, rent, gifts, medicine, clothing, education, technology, gym membership, gas … you get the picture. We’re often asked, “How to budget my money?” so we came up with the ultimate guideline for when you set up a budget: the 50/20/30 Rule.

When creating a budget, which you can do for free in the Money Center, it’s tempting to throw up your hands, say, “Forget it,” and hope for the best.

The 50/20/30 Rule changes that.

No matter whether you’re a mom with two kids or a recent college grad working your first job, this rule will help you not only figure out how much you should be spending in each area every month; it will also tell you in what order you should be spending your money.

The 50/20/30 Rule Broken Down

The 50/20/30 Rule is easy because instead of telling you how to break down your budget across 20 or more different categories (who could possibly keep track of that?), it splits everything into three main categories:

1. Essential Expenses

No more than 50% of your take-home pay should go toward Essential Expenses, which are the expenses you need in order to maintain the fundamentals of your life: shelter, food, heat, etc. Only four expenses go in this category: housing, transportation, utilities and groceries.

2. Financial Priorities

At least 20% of your take-home pay goes to Financial Priorities, which are the goals that are essential to a strong financial foundation. These include your retirement contributions, savings contributions and debt payments, if you have debt.

You should make these contributions and payments after you pay your Essential Expenses, but before you do any other spending.

3. Lifestyle Choices

No more than 30% of your take-home pay should go to Lifestyle Choices, which are personal, voluntary and often fun choices about how you spend your discretionary income. They often include cable, internet and phone plans, charitable giving, childcare, entertainment, gym fees, hobbies, pets, personal care, restaurants, bars, shopping and other miscellaneous expenses.

While Lifestyle Choices are the last things you should buy in your budget, you should never feel guilty about that expensive purse or ordering a nice bottle of wine at dinner … as long as you’ve taken care of your Essential Expenses and Financial Priorities first.

How the 50/20/30 Rule Works in Real Life

The flexibility of the 50/20/30 Rule makes it easily adaptable to real life. Let’s compare two budgets, one for Molly and one for a couple, Sarah and Tim.

RELATED: How to Set Up a Budget for Financial Emergencies

Molly

Molly is a 22-year-old recent graduate with her first job, working in Chicago. She has student loans, but she is still able to meet her student loan payment every month and contribute to a Roth IRA, plus pay all her bills.

Her income: $36,000 a year
Her take-home pay after taxes: $2,250 a month (we’re assuming 25% of her salary goes toward a combination of taxes and her 401(k) contributions)

Essential Expenses:
Rent: $750
Transportation: $75
Utilities: $75
Groceries: $200
TOTAL:  $1,100, which is 49% of her take-home pay

Financial Priorities:
Student Loan: $225
Roth IRA contributions: $200
Travel savings fund: $50
TOTAL: $475, which is 21% of her take-home pay

Lifestyle Choices: $675, which is 30% of her take-home pay

Because Molly is on a tight budget, her Essential Expenses are very close to the 50% limit. Still, she is able to make her student loan payment and even put 9% of her take-home pay toward retirement, where the money will have a long time to grow. 

RELATED: How to Budget My Money for Commuting Costs?

Sarah and Tim

Sarah and Tim are in their mid-40s and have two children nearing college age.

Sarah and Tim’s household income: $150,000 a year
Their take-home pay after taxes: $6,767 a month (we’re assuming 30% of her salary and her husband’s go toward a combination of taxes and their 401(k) contributions)

Essential Expenses:
Mortgage: $1,200
Car payment and insurance: $600
Gas: $250
Groceries: $400
Utilities: $150
TOTAL: $2,600, which is 38% of their income

Financial Priorities:
Roth IRA contributions: $833
529 account contributions: $1,470
Vacation fund: $200
TOTAL: $2,503, which is 37% of their take-home pay

Lifestyle Choices: $1,664, which is 25% of their take-home pay

Sarah and Tim’s situation shows how flexible the 50/20/30 Rule can be. Essential Expenses are supposed to be “no more than” 50%, and Sarah and her husband have actually been able to keep them well below that threshold. They paid off one of their cars a while back and haven’t bought a house that stretched their budget.

What they’re doing with the money they’re saving on Essential Expenses is putting it into their kids’ 529 accounts. But they are still maxing out their Roth IRA contributions because saving for retirement is a higher financial priority than saving for their children’s college funds–not because their children’s education is less important, but because they could always take out a loan to make up any shortfall to pay for college tuition, but they can’t take out a loan to pay for their retirement.

In order to meet their 529 savings goals, they have decided to be as frugal as possible about their Lifestyle Choices, which is why they are allocating only 25% of their income to those.

One Note About Retirement

As you might have noticed, the 50/20/30 Rule applies only to take-home pay. Any contributions you make to retirement before your paycheck hits your bank account are not included. For that reason, you are actually contributing more toward your Financial Priorities than this breakdown would suggest. But we urge you to keep that retirement money out of sight, out of mind!

RELATED: Serious Issues – How to Set Up a Budget for a Divorce

(If you are self-employed and don’t have your retirement contributions taken out of your paycheck before it hits your bank account, you’ll need to make sure you’re hitting your retirement goals, and that could mean contributing more than 20% of your income to Financial Priorities.)

How the 50/20/30 Rule Applies to Your Budget

Now that you see how the 50/20/30 Rule applies to two very different situations, it’s your turn to use it on your own budget. The LearnVest Smart Budget will analyze your current spending to see how it stacks up against the 50/20/30 Rule. If you don’t already have a budget with LearnVest, sign up here. The sign up process will ask you to enter your Essential costs and your Financial Priorities, and at the end, you can allocate money to your Lifestyle Choices. And setting up a budget that will save you money is absolutely  free.

What's New

  • Jone7007

    I find it interesting that Health Inscurance is not considered an Essential Expenses.

    • laurashin

      Hi Jone7007,

      The budget is made with your net paycheck — the money that hits your bank account. Most people with full-time jobs that offer health insurance pay for it pre-tax through their employer. For that reason, it’s usually not included in the budget. However, if you’ve set up your budget on our site, you can create a health insurance folder to account for that expense.

      Let us know if you have any other questions.

      Thanks!
      Laura

  • Freshjyve

    Your utilities budget wouldn’t cover most people’s cell phone plan. #unrealistic

    • MmY25

      Utilities = electricity (i.e. heat, keep the lights on).

      A cell phone is a lifestyle choice.  If you want to have a cell phone then you can contribute to that from your 30% lifestyle choices budget.  If it’s that important to you to have one, wouldn’t you sacrifice a night or two out with friends?

  • Jeanesilvr

    if you want to be accurate …………. 10% + off the top to charity …… for realistic to those of us who believe so. who can get a $50/mo car + insurance payment? where? hahahaha.$75 transportation must be walking shoes. this is what frustrates people trying to manage their finances………. we really need reality.

    • Mmy25

      30% Lifestyle choices: 10% to charity, 20% remaining to have fun – how is that not accurate?  If it is important to you to contribute 10% to charity, wouldn’t you be willing to utilize the “fun” money to do so?

      $75 for transportation assumes that because Molly is in the city, she uses public transportation only (because right now, that appears to be what she can afford)

  • Lindenchariot

    Overall this is very helpful for me. However, I find it odd that childcare is considered a “lifestyle” choice. If I want to work, childcare is an essential expense. 

    • Michelle

      I completely agree with this assessment. I guess having a family is a “lifestyle choice,” but come on.

  • Ranijnaik

    What if you run your own business from home? How can I apply this budget to my business and taxes?

  • Bkemp1978

    In the first example for Molly, hypothetically, what if her transportation costs were not $75 a month from what I’m imagining is due to her taking the CTA – Chicago Transit Authority’s buses and subways. Instead Molly still lives in Chicago but has a job in the suburbs which requires driving a car to get there (payment of $275), gas ($200), car insurance ($85), a parking space in Chicago ($220) and tolls ($40). Totaling $820 for transportation, she now has $5 for rent. WWMD (other than increase her Xanax intake due to stress)?

    • RM

      What Molly should do is consider whether this job in the suburbs is a good financial decision for her right now. 

      Is she going to make more money by accepting it?  Then maybe it will offset the increased costs to get there.  If not, then she might not be able to afford to live in the city and take a job in the suburbs.  She would need to consider moving closer to the job or not taking a job in the suburbs until she can afford it.  

      • Bkemp1978

        Molly has had the job in the suburbs for ten months. It took her 3 years to find this job and it would be good for her resume to continue there. Leases to apartments in Chicago and leases to cars, unfortunately, don’t just go away because you want them to.

    • gigi hall

      Even $75/mo in the city is unrealistic. She can take the bus for $18.75 per week? In my area, a daily bus pass is $3.50 per day – so $17.50 for the 5 days Molly works. And she walks sat & sun.

  • http://www.makingloveinthemicrowave.com/ Aja Jackson

    Please let me know where Sarah and Tim live that in the same area where its reasonable for you to achieve a household income of 150k its also possible to find a mortgage paying 1200/ month. Where I live, you “may” be able to find a mortgage in an okay neighborhood with a mediocre school system at $1200, but you’d be hard pressed to find jobs making more than 75k a piece. On the other hand, if we moved closer to DC, we could find jobs making that much, but a 1200 mortgage would either be non-existent or we’d be living in a dump. Not to mention, our Gas and Electric bill for a family of 4 is close to $300/month. Sorry, I just find most of your #s to be unrealistic for today’s families. 

    • Laura

      Strangely enough this is very achievable in Roanoke, VA. (about 5 hours south of DC). Prior to becoming a SAHM my Husband and I both worked. Combined we made $150k, our mortgage is $1300 for a 4 bedroom, 2.5 bathroom home that is only 10 years old. The utilities are low, considering we also have a 6 year old Daughter. The gas and electric combined were approx $155 last month. We live in a good school district on a cul-de-sac with a nice flat large backyard. By living here, we’ve been smart with our finances and I’ve been able to stay home and take care of our Daughter. Every month we also contribute a large amount to our Daughter’s VA529 Prepaid College Plan as well as we contribute 14% of my Husband’s salary to his 401K. It can be done.

      • MustBeSaid

        Sorry to hear you live in VA. I was subjected to that torture for 13 years. Glad I got out of that draconian state.

      • gigi hall

        Curious. you live in Roanoke? Where does your husband work? How much does that “cost” in commute time and actual transportation expenses? Because Roanoke is more suburban/rural than the DC area.

  • Christine

    I was wondering about childcare not being an essential expense. And what is a person to do if their essential expenses are waaayyyy more than 50% of their income? And please don’t say find a higher paying job, because that isn’t always an option.

  • fifarra

    %25 to %30 goes to taxes and retirement? Poor Americans.

  • http://twitter.com/HatcherByles Lisa R. Hatcher

    This is great information which I strongly encourage my clients to follow. However, I take issue when LearnVest asserts that they developed this approach. Rather, it is Senator Elizabeth Warren and her daughter, Amelia Warren Tyagi, who developed the 50/30/20 rule of thumb in their 2006 book “All Your Worth: The Ultimate Lifetime Money Plan.” Give credit where credit is due!

  • Gigi Hall

    I found the budgets pretty unrealistic as well. I don’t know who can commute to work on $75/month. $150 for utilities is also unrealistic for a house – and that’s presuming it’s just power (gas or electric) water, and sewage. $1200 mortgage on a house that accommodated 2 children? and $400 groceries for 4 people? I don’t think that’s do’able at all in my area. I think $200 in groceries, per month, for Molly is some what unreasonable as well but maybe depending on where in the US she lives.

  • Erin1386

    I do see the issue with fitting transportation costs into the 50% of Essentials, but wouldn’t a car loan fit under “debt” which goes into the 20% section? So only the gas, car insurance, & maintenance of vehicle need to be accounted for in the transportation section of Essentials? Is that right or wrong?