The 50/30/20 Rule: How to Save More and Overspend Less

Over-complicated budgeting tools got you down? Try this simple 50/30/20 rule to organize your money and create a budget.

7 min read

Raise your hand if you’ve ever downloaded a budgeting app with great intentions to finally get your spending under control, only to abandon it by the third day when you realize that you’d already forgotten to add your six to-go iced coffees for the week. Sound familiar?

Budgeting and managing your finances go hand-in-hand, but that doesn’t mean it needs to be complicated, nor take time out from your day. In fact, the best budgeting tips are often surprisingly the most simple.

The 50/30/20 rule is a smart and straightforward monthly budgeting method that tells you exactly how much to put towards your savings and your living costs each month. With a clear big-picture overview of your budget for the month, you can confidently avoid overspending and consistently build up your savings, all without painstakingly recording every single transaction. 

So, ready to create a realistic budget that you can stick to? Let’s get started.

What is the 50/30/20 rule?

The 50/30/20 rule is an easy budgeting method that can help you to manage your money effectively, in a simple and sustainable way. The basic rule of thumb is to divide your monthly after-tax income into three spending categories: 50% for needs, 30% for wants, and 20% for savings, or paying off debt.  

By regularly keeping your expenses balanced across these main spending areas, you’ll be wiser about your spending habits, and avoid overspending. And with only three major categories to track, you’ll save yourself the time and stress of digging into the details every time you spend. Sticking to the 50/30/20 rule will make it easier to stay on track to reach your financial goals, whether that’s saving up for your next vacation or to clear existing debt.

Where did the 50/30/20 rule come from?

The 50/30/20 rule originates from the 2005 book, “All Your Worth: The Ultimate Lifetime Money Plan,” written by Elizabeth Warren, Harvard bankruptcy expert and US senator, and her daughter, Amelia Warren Tyagi. 

Referencing over 20 years of research, Warren and Tyagi echo our thoughts—to get your finances in check, you don’t need to follow a complicated budget. All you need to do is balance your money across your needs, wants, and savings goals, just by using the 50/30/20 rule.

Elizabeth Warren.

U.S. Senator Elizabeth Warren speaking in Des Moines, Iowa. Photo by Gage Skidmore.

How does the 50/30/20 rule work?

The 50/30/20 rule simplifies budgeting by dividing your after-tax income into just three spending categories: needs, wants, and savings or debts. 

Knowing exactly how much to spend on each category will make it easier to stick to your budget, and help keep your spending in check. Here’s what your budget looks like when using the 50/30/20 rule: 

Spend 50% of your money on needs

Simply put, needs are expenses that you can’t avoid—payments for all the essentials that would be difficult to live without. 50% of your after-tax income should cover your most necessary costs.  Needs include:

  • Rent

  • Electricity and gas bills

  • Transportation

  • Insurances (for healthcare, car, or pets)

  • Minimum loan repayments

  • Basic groceries

For example, if your monthly after-tax income is $2,000, $1,000 should be allocated to spend on your needs. While this budget may differ from one person to another, if your total needs expenses are much higher than 50% of your take-home income, Warren suggests making some changes that could lead to a healthier financial life. This could mean swapping to a different energy provider, or perhaps even looking for a cheaper apartment.

Use 30% of your money on wants

With 50% of your after-tax income taking care of your most basic needs, 30% of your after-tax income can be used to cover your wants. Wants are defined as non-essential expenses—things that you choose to spend your money on, although you could live without them if you had to. These include:

  • Dining out

  • Clothes shopping

  • Holidays

  • Gym membership

  • Entertainment subscriptions (Netflix, HBO, Amazon Prime)

  • Groceries (other than the essentials)

Using the same example as above, if your monthly after-tax income is $2,000, you can spend $600 for your wants. And if you discover that you’re spending too much on your wants, it’s worth thinking about which of those you could cut back on. 

Following the 50/30/20 rule doesn’t mean not being able to enjoy your life. It simply means being more responsible with your money by finding areas in your budget where you’re needlessly overspending. If you’re confused about whether something is a need or a want, simply ask yourself, “Could I live without this?” If yes, that’s a want, not a need. 

Stash 20% of your money for savings

With 50% of your monthly income going towards your needs and 30% allocated to your wants, the remaining 20% can be put towards achieving your savings goals, or paying back any outstanding debts. Although minimum repayments are considered needs, any extra repayments reduce your existing debt and future interest, so they are classified as savings. 

Consistently putting aside 20% of your pay each month can help to build a smart savings plan such as an emergency fund, a comprehensive, long-term personal financial plan, or even a downpayment on a house. If you bring home $2,000 after tax each month, you could put $400 towards your savings goals. In just a year, you’ll have saved close to $5,000.

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

So, how do you actually use the 50/30/20 rule? To put this simple budgeting rule into action, you’ll have to calculate the 50/30/20 ratio based on your income and categorize your spending. Here’s how:

1. Calculate your after-tax income

The first step to using the 50/30/20 budgeting rule is to calculate your after-tax income. If you’re a freelancer, your after-tax income will be what you earn in a month, minus your business expenses and the amount you’ve set aside for taxes. If you’re an employee with a steady paycheck, this will be easier—take a look at your payslip to see how much lands in your bank account each month. If your paycheck automatically deducts payments such as health insurance or pension funds, add them back in. 

2. Categorize your spending for the past month 

To get a true picture of where your money goes each month, you’ll need to see how and where you’ve spent your income over the past month. Grab a copy of your bank statement for the past 30 days, or simply use the Statistics feature in your N26 app—it automatically sorts all your transactions into categories, such as salary, food and groceries, leisure and entertainment, and more.

Now, split all your expenses into the three categories: needs, wants, and savings. Remember, a need is an essential expense that you can’t live without, such as rent. A want is an additional luxury that you could live without, such as dining out. And savings are additional debt repayments, retirement contributions to your pension fund, or money that you’re saving for a rainy day. 

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

Now that you can see how much of your money goes towards your needs, wants, and savings each month, you can start to adjust your budget to match the 50/30/20 rule. The best way to do this is to assess how much you spend on your wants every month. According to the 50/30/20 rule, a want is not extravagant — it’s a basic nicety that allows you to enjoy life. As cutting back on your needs can be a complex and challenging task, it’s best to work out which of your wants you can cut back on to stay within 30% of your take-home income. The more you reduce spending on your wants, the more likely it is that you’ll be able to hit your 20% savings target.

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Budgeting can be a great way to feel more reassured and in control. With  N26, managing your money and reaching your budgeting goals are a breeze. Access your money from anywhere with your 100% mobile bank account, and get instant push notifications for an up-to-date picture of your finances. What’s more, your free Spaces sub-accounts can help you track multiple savings goals at once, while the Statistics feature will automatically categorize your spending for you to help you keep on track. Open an account today in just 5 minutes to get started.

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