50/30/20 rule

What It Means

The 50/30/20 rule is a budgetingBudgetA plan for a set period, usually a month, that lists the money you expect to receive and how you'll spend or save it. See more guideline for after-tax income. Half goes to needs, such as housing, utilities, groceries, insurance and the minimum payment on each debt, and 30% goes to wants, like dining out and entertainment. The remaining 20% goes to savings and to paying debt down faster than the minimums require.

How It Sounds at Home

• "Is that a need or a want?"
• "I'm trying to stick to 50/30/20."
• "Rent alone eats half my paycheck."

The Breakdown

Worked example. Take-home payTake-home payThe money that actually reaches you from a paycheck after taxes and other deductions are taken out, also called net pay or net income. See more of $4,000 a month:

What counts where

• Needs: rent or mortgageMortgageA loan used to buy or refinance a home, secured by the home itself and repaid in monthly installments over a set term. See more, utilities, basic groceries, insurance, transportation to work, and the minimum payment on each debt.
• Wants: restaurant meals, streaming and cable, hobbies, travel, and clothes beyond the basics.
• Savings: an emergency fundEmergency fundMoney set aside only for unplanned costs, like a car repair, a medical bill or a lost paycheck, kept where you can reach it quickly. See more, retirement contributions, a down paymentDown paymentThe share of a home's price you pay upfront in cash when you buy it; the mortgage covers the rest. See more fund, and any debt payment above the minimum.

What the result means. If needs cost $2,300 on that $4,000 income, they take 57.5% of pay, and the extra $300 has to come out of wants or savings. Taking it from wants first keeps savings on track. When needs stay well above half month after month, look at the largest needs, since trimming wants can only cover so much.

Where It Comes From

Elizabeth Warren and her daughter, Amelia Warren Tyagi, laid out the split in their 2005 book "All Your Worth: The Ultimate Lifetime Money Plan," where they called it the Balanced Money Formula. Warren, a bankruptcyBankruptcyA federal court process for people and businesses that can't pay their debts, ending in a discharge of many debts after an asset sale or a repayment plan. See more expert at the time, later became a U.S. senator.

Good to Know

Use take-home pay, the amount left after taxes and payroll deductions, as Warren and Tyagi framed it. Minimum payments on debtsLiabilitiesDebts and other money you owe, such as a mortgage, a car loan or a credit card balance. Your assets minus your liabilities is your net worth. See more sit with needs, and anything you pay above the minimum counts toward the 20%. MIT Student Financial Services and Henrico County's employee guide both walk through the same three parts, which makes either one a handy second explanation.

Related Terms and Categories

• Budget

  A plan for a set period, usually a month, that lists the money you expect to receive and how you'll spend or save it.

• Needs vs wants

  The split between costs you must pay to live, work and protect what you have (needs) and extras that would be nice to have (wants).

• Take-home pay

  The money that actually reaches you from a paycheck after taxes and other deductions are taken out, also called net pay or net income.

• Discretionary spending

  Money spent on things you want rather than need, like eating out, entertainment and travel. In government, the spending Congress sets each year.

• Emergency fund

  Money set aside only for unplanned costs, like a car repair, a medical bill or a lost paycheck, kept where you can reach it quickly.

• Zero-based budget

  A budget that assigns every dollar of income to spending, saving or debt, so income minus everything assigned equals zero.

Household money and budgeting