How to Budget Your Money With the 50/20/30 Rule

Laura Shin

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 a guideline to consider 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 may be tempting to throw up your hands, say, “Forget it,” and hope for the best.

The 50/20/30 Rule helps change that.

No matter whether you’re a mom with two kids or a recent college grad working your first job, this rule can 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 can be 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 should go in this category: housing, transportation, utilities and groceries.

2. Financial Priorities

At least 20% of your take-home pay should go 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 can make it easily adaptable to real life. Let’s compare two real budgets, one for Molly and one for a couple, Sarah and Tim.

RELATED: How to Set Up a Budget for Financial Emergencies


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 for them 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 may actually be 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 should 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 Can Apply to Your Budget

Now that you see how the 50/20/30 Rule applies to two very different situations, it’s your turn to consider using 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 can help save you money is absolutely free.


LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc. that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. Unless specifically identified as such, the people interviewed in this piece are neither clients, employees nor affiliates of LearnVest Planning Services, and the views expressed are their own. LearnVest Planning Services and any third parties listed in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies.

  • travis

    This is asinine. My family of four has a $1,050 per month health insurance premium. It is approx. $100 more per month than my mortgage. Your little exercise works if your health insurance is free and provided by our Wonderful Leader Obama.


    My oil bill alone was $700 last month, so she is way of on $150 a month utilites

  • Luba Gladkova

    Some of these numbers are completely unrealistic and would vary depending on the city where the person lives.

  • maytrix

    It amazes me that people have to complicate everything. My father, an accountant, put everything in perspective many years ago. “Make more than you spend or spend less than you make”. If you follow that philosophy you will be financially successful. Keep it simple.

  • Ben

    “No more than 50% of your take-home pay should go toward Essential Expenses.” Doesn’t the term essential imply that you cant do much to lower this? Also what makes childcare an optional expense. Is the author implying a single parent can just leave her 2 year old home alone or something.

  • EyesThatRoll

    There is so much wrong with this article I could pick it to pieces, but I’m only going to look at the three that irked me most.

    Childcare: I find it interesting that childcare is listed as a lifestyle choice. HA! Not everyone has a white wine mom or dad that can stay at home being the care worker on top of everything else. Most households that are dependent on a dual income and all single parent households REQUIRE childcare to work making it an ESSENTIAL cost.

    Income Bracket: If you make more than 50k a year (dual or single income), a 30% assumption for 401k/health, benefits off income is a joke. Try 35%.

    Mortgage/Rent: When making assumptions about rent/mortgages, please at least give a range to take into account areas where the cost of living is higher. In LA or New York 1200 a month wont get me a closet.

  • Ella

    Childcare is a lifestyle choice??!!? Ha!

  • William Petersen

    So the couple that earns $150K a year has only a $1200 a month mortgage ? Where do they live exactly ? Certainly not Chicago ! I hate these things.

  • unskinator

    It is nice to be making budgets when you have money to play around. But when all of it goes just to pay essential bills and groceries its a different story. Example in the story with 36000 income and only $75 goes for transportation. Does she walk. No car? No public transport. go figure.

  • Shari R.

    Childcare is discretionary?

  • rgrace

    I think the principle is potentially logical, but the housing aspect is hopelessly naive, unless you live in Ohio or Iowa. It’s a budget-buster anywhere where there is a decent economy – Eastern Seaboard, Pacific Northwest, L.A. and Northern California. The rent alone for us is 1/3 of my net. Another big flaw: health expenses. Co-pays and prescriptions alone must be tracked in any budget. Ours come to $200 or more each month, often significantly more. How about dental? Is that optional? Those must be considered essential, because I don’t consider it a wise choice to eschew health coverage.

    • rgrace

      By the way, I do want to mention that this is a constructive idea and I used it to compile a sample budget for us just now.

  • SamB19

    Utilities $75? Are you kidding? In the northeast, heating alone (even with high efficiency gas furnace) can be a few hundred dollars a month for 5-6 months out of the year. In my town, our property tax alone is $800 a month.

  • GWBear

    Wow! There’s a lot wrong with this article.

    First, there is a huge miss on healthcare. That’s supposed to be in part 1, and for many of us is as large as a major utility bill – or more per month. Meds, rehab, health insurance, etc. it’s all critical and essential. Some pay more for healthcare than they do on rent or mortgage. For most Americans today, if they can cover essentials on 80-90% of their income, they consider themselves lucky.

    Second, the 50% for essentials is a complete joke. If most Americans could live like that, economic, job, healthcare, quality of life, retail spending… none of these would be in the news as they are. It takes a very hefty paycheck indeed to be able to cover your essentials on 50%, even if you are living quite frugally, as I always have. Any one who can do this is petty much in the Upper Middle class at least.
    For articles like this to be valuable, they need to reflect reality for the majority. Sadly, this article does not come close.

  • Shawn Neil

    I think this plan is a great rule of thumb although I would switch it to 50/30/20. Keep discretionary expenses lower allows you to save more for an emergency fund, retirement, or down payment on something.

  • dharri11

    Nor is childcare an essential expense yet I am unable to work unless I pay for childcare. Per child I estimate I paid$40,000. Also $650 mon. to cover my family’s for health, dental, disability insurance etc- a big chunk of change which makes my essentials higher. Add $650 plus $500 a month for both together and i have a LOT less than 30% for discretionary “nice bottle of wine”. Actually I’m lucky to go out to eat- it is a rare event.

  • dharri11

    I see that childcare is lumped together with “entertainment, gym fees, hobbies”- very strange to put caring for our children as equivalent to hobbies!. It is absolutely an essential expense- otherwise we can’t work. Average childcare is ~$600 month. I also pay ~$650 for health/dental/vision/disability etc. Also absolutely essential to cover my family’s health and well being. So if I earn say $40K, my above essentials are a far higher %. Many people don’t even earn $40K and still have similar expenses. There are wide variations in what people pay for essentials- and what they have left over for discretionary. I can’t even remember the last time I ordered a bottle of wine for dinner- actually never! We are lucky to go out to eat period. Very skewed article.

  • Don Dressel

    I take home 4200 dollars a month but after paying 2200 dollars on my mortgage and 1500 a month on my utilities and car payments and other bills it does not leave me much for savings. I cant refinance my house as it is underwater and the same goes for my car.

    • samuel jackson lager

      My take home pay amount is similar to yours (about $4800/month). I currently rent but would like to own a home, and was pre-approved for a mortgage that was also similar to your (around $2100/month). I found that to be a bit expensive for me. The cost of financing a home is often more costly than the home itself. I’m just going to save up cash and pay for my house outright, or at least a big chunk of it. Im not one to give financial advice, but once you pay off your car, you should start feeling some relief.

      • Don Dressel

        Thank you for your reply. Yes you are right but the problem I have is with my wife wanting to keep two cars that I am paying on because she put the down payment and I had agreed to make the payments but I thought she would sell our other car that is payed off. I have my muscle car which does cost me 562 dollars a month which some people would say is stupid but I have always been a car nut and it is my only hobby and I pay 241 dollars on the other car. We are retired and have 4 cars which I keep telling her is stupid.She will not sell any of the other three. I do have a lot of tax write off as I own 2 houses. Good luck on buying the home but remember just save up for a big down payment and depending on where you live homes could go up as you are saving for one. Homes are very expensive where I live.

  • samuel jackson lager

    This article should take into consideration where a person lives. In Texas, your housing dollar goes a long way, but in California, home prices are outrageously high.

  • Dywlf

    Great article for yuppies and banks. Minimum wage(what most obama victims make) will not apply itself to this formula. $8.25X40hr=$330X52/12=$1430 month. Now, and I will be generous to the author, rent ~$500 leaves $930, auto ~$250 leaves $680, Auto Insurance ~ $100 leaves 580, Gasoline to get to work and back for the month ~ $100 leaves 480, healthcare under the obama ~$400 leaves $80 dollars, electricity can vary through the year but lets average $100 month leaves -$80 dollars. Whoops, in the hole already and we haven’t addressed food(now a major salary chunk), clothing, and God forbid children live in this household. Yeah, great idea generated by the oligarch for you to save 20% in their banks, but they should be ashamed of their selves!

  • Dave

    This is actually a very good starting point for a budget. Our family has been living it for close to 15 years now. Sometimes it’s 60/20/20 or 40/30/30 but for the most part it has been 50/20/30. I recommend not getting too wrapped up in the details and just start using it and adjust over time. It may not fit everyone’s situation perfectly but at the same time it won’t work at all if you don’t try it.