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The 50/30/20 Budget Rule - What it is and How to create one

April 21, 2023

Table of Contents

    Table of Contents

      Let’s talk about the 50/30/20 budget rule

      When it comes to this rulebook, there are two ladies who should get credit - Elizabeth Warren and her daughter Amelia Warren Tyagi, who comprehensively covered the 50/20/30 budget rule in their book titled, "All Your Worth: The Ultimate Lifetime Money Plan."

      This rule distributes the income into three individual vessels based on your total income after tax (takeaway home income). And allocate 50% to needs, 30% to wants, and 20% to financial goals. The purpose of this method is to instill a sense of discipline in terms of spending the money, and, at the same time ensure that you neither compromise on the quality of your lifestyle nor your long-term planning goals.

      Unavoidable expenses are account for 50% of your after-tax income, such as groceries, rent payments, healthcare, etc. 

      Savings and investments account for 20% of the income. This means 20% of your takeaway home money should be invested as emergency funds and for long-term goals.

      And the remaining 30% of your income can be spent on your wants. Overall, this head accounts for non-essential items that are just for entertainment and for a good lifestyle.

      Now, as the budget rules are clear, let’s categorize your expenditure vessels into needs, wants and savings.


      Needs are fixed expenses that you have to pay to comfortably live your life. This includes basic groceries, childcare expenses, rent payments or mortgage payments, healthcare, transportation, utilities, and insurance. With the standard rule of budgeting, your needs take away a chunk of your income, which is why it’s best to allocate 50% to cover all your bills and payments.  

      If you are overspending on needs, then you will have to either reduce your wants or try to downsize your lifestyle. Limit frequent takeaways to once a month and cook more often at home, switch to car-pooling or taking public transport instead of burning fuel. A minimalist lifestyle may be the answer to all your problems with regards to lifestyle inflation and the habit of overspending.


      In simpler terms, “Wants” are the luxury things that money can buy. In short, the expenditure is not required for survival but is something that you aspire for. These are expenses that you can live without, but having them certainly allows for a pleasant lifestyle. Going out for Friday dinner, grabbing the PS5 as soon as it’s launched, and a week’s vacation to the Maldives are all things that make life more enjoyable and comfortable with the extra money you spend. 

      This is the most confusing section to categorize, as human wants are unlimited unless you are content with fewer necessities. Desires are always never-ending, which is why when you are not in control, there’s a possibility of you trying to overspend, if you let your impulse take a shot. If you are already tight with your pocket, there are ways you can still lead a pleasant life without letting your wallet take a hit. 

      You can watch sports on TV rather than buy a game ticket, or you can work out in the house instead of going to the gym. This also includes the upgradation decisions that you make, such as buying a Mercedes instead of another economical car, or choosing to buy a villa when you are already comfortable in an apartment.  

      This is why you should be smart with your finances and only spend close to 30% of your income on this category. If you are able to save anything in this 30%, it can be saved for your long-term goals.

      Savings: 20% 

      As your needs and wants are fulfilled at present and with 80% of your income, the remaining 20% of your income should be saved and invested or used to repay debt payments (if any). This is the most important section, yet the most ignored one. This means depositing money into a reserve fund, like saving bank accounts, investing in mutual funds, and the stock market, which almost always takes a backseat in our lives until it becomes the wise choice we regret not taking years ago! 

      While this category only takes a sliver of your income, savings should be the utmost priority and need not be debatable. You can delay everything, but your savings and long-term investment shouldn’t stop, even if it means you have to postpone your trip to Goa with your friends.

      If you are only taking the first steps towards savings, we suggest starting with sliding in your money and creating an emergency fund before you proceed with actions such as investing. Emergency funds must be equal to six to eight months of your expenses so that they can cover you if a financial crisis strikes. 


      How to create a personal budget with a 50/30/20 budget rule 

      The majority of people spend too much and unknowingly save too little. Implementing the  50/30/20 rule is a way to be conscious of your financial habits and limit yourself from under-saving and over-spending. It helps you spend less on things that are not important and save more. 

      Here are some ways you can figure out your own financial numbers that align with this method and help you stick to it: 

      Calculate monthly income: Check the money you receive in your bank account each month, and reduce the income accordingly for any estimated tax payment. If there is a workplace retirement plan, find out how much it is and add it to your income after tax.

      Calculate spending: To see how much you are supposed to spend in a 50/30/20 ratio, multiply your after-tax income by 0.50 (for needs), 0.30 (for wants), and 0.20 (for savings).

      Budget planning importance: Create a personal budget list for the month and allocate such expenses in their particular category (needs, wants and savings). Match your monthly expenses, which come under each category, and spot whether you are spending more or less than the targets you set in your earlier step. You can use a a 50/30/20 Rule Spreadsheet to make this process easier.

      The budget follows: Keep an eye on your expenses each month, and make changes if needed, to stay within your spending thresholds going forward.

      How the 50/30/20 budget rule is more effective than other budget methods

      While the 50/30/20 rule is the most popular, there are a few other techniques as well in the town.

      In the 80/20 Pareto principle, you straight-way set aside 20% of your after-tax income in savings. The remaining 80% you can spend in whatever way you want; no tracking is required.

      Another budget technique is 70/20/10 rule, which is quite similar to the 50/30/20 budget. But as per this method, you should spend 70% on living expenses, 20% on debt payments, and 10% on savings. 

      As we can see in the above budget planning techniques, in the one with the 80/20 rule, there is no bifurcation between the amounts spent on needs and wants. As you cannot segregate between needs and wants expenditure, you may overspend on wants rather than on your needs. In such a case, if the rent is due at the end of the month and you overspend on wants then the funds allocated to savings need to be withdrawn to pay the rent. Hence, the 80/20 technique is not completely viable. 

      And in the 70/20/10 budget rule, the funds allocated to savings are only 10% of your in-hand income. The savings will be lower in this method as compared to the 80/30/20 technique, where 20% of your salary will be set aside in savings. 

      With the change in time, many companies have stopped providing retirement plans to their employees. As a working professional, you need to think about their financial status in later years of life so that they have sufficient money for a good lifestyle. 

      With budget planning by using the 50/30/20 method, you can successfully manage and stabilize your lifestyle. By using this rule, you can easily keep track of your spending and savings. 

      Once you are aware of the fund’s inflow and outflow, you will be able to have greater control over how you want to spend and save. Savings is difficult for many of us, and at times, we incur unexpected expenses. By using this rule, you can plan how to manage their after-tax income. Following this mantra will ensure you that your money is not only just spent but utilized appropriately. 

      If you find the expenses incurred under the head ‘wants’ are more than 30%, you can find ways to reduce these expenditures. And this will help to keep these funds for more important areas like emergencies and retirement. 

      Happy savings!