At the end of every month, it is always the same story: you realize you have spent too much money and want to start a new chapter at the beginning of the next one with more responsible money habits.
But then the next month comes, and you’re again in the same position.
Fortunately, we can help you learn to budget like a pro. And the best part is that you don’t need to change your lifestyle to do so.
You just need to have the right mindset, a little discipline, and a rule of thumb that works.
If you’re ready to make some significant changes to your budgeting, keep reading this article and learn how to use the 50/30/20 rule and what else you can do to improve your finances.
What Is the 50/30/20 Rule?
The 50/30/20 budgeting rule is designed to help every individual, whatever their income, arrange their after-tax income in the most beneficial order. It tells you to divide your net income into only three major categories:
- Fixed expenses (or essentials)—50% of your monthly income
- Flexible expenses (or wants)—30% of the monthly tax income
- Savings—the remaining 20%

The Backstory of the 50/30/20 Rule of Thumb
A Harvard law professor, Senator Elizabeth Warren, coined the term “50/30/20 rule.” She and her daughter, Amelia Warren Tyagi, popularized this method in the book All Your Worth: The Ultimate Lifetime Money Plan.

This rule of thumb was primarily designed for working-class families. The basic idea was to help them plan their spending and prepare for future and unexpected situations.
Let’s dig into more detail about the three categories.
Fixed Expenses
The idea is to put half of your after-tax income into this category. It’s also called “needs” or “essentials,” and it involves everything necessary for one human being, including the following:
- Housing;
- Groceries;
- Utilities;
- Health care;
- Transportation.
These five categories are our essential needs—we need a roof over our heads, a car to go to work, and basic groceries are self-explanatory.
An important note for you is that 50% of your income is for all listed categories, not just one of them.
The percentage inside this bucket is adjustable depending on your situation. Some people live in high-rent areas, so they spend more money on housing, but they can walk or cycle to work, so their transportation expenses are low, if any. You should keep in mind that housing costs can include mortgage rent, taxes, insurance, and homeowners association fees (HOA dues).
It’s more about the total sum than individual costs. Your challenge is to stay within 50% of your income range.
Flexible Expenses
30% of your monthly after-tax income is reserved for flexible expenses, or “wants”. This category is different for everyone because it depends on your lifestyle, age, monthly income, hobbies, and preferences. Here is a list of examples of what is considered “flexible expenses,” so you get an idea:
- Child-care;
- Health insurance;
- Personal (refers to home security, mobile phone, internet, cable TV, streaming services, grooming, clothing, travel, gym memberships, sporting events, fun money, etc.);
- Education;
- Debt payments (credit card debt and loans).
Even though child care and health insurance aren’t as optional as buying handbags, we still get to choose how much we are willing to pay.
Most of the other things on this list are not essential for living, but that doesn’t mean we can’t enjoy them. The most important lesson every person should learn is to stop overspending on this category and to be mindful and organized. That’s exactly what the 50/30/20 rule intends to teach us.
We need to truly understand our income and spending habits to manage money better and achieve our financial goals. But don’t let this overwhelm you; it is possible to change your bad habits and create new ones.

Savings
The remaining 20% of your monthly after-tax income goes to savings and debt repayment. Our philosophy is that this is the most important element to consider, and we should prioritize it.
Money from a savings bucket can be used not only as an emergency fund but also for investment opportunities, retirement contributions, loans, and credit card payments.
Many people make the mistake of thinking it’s enough just to save money. We want to teach you that savings and debt repayment are crucial, but so is investing. If you just stash dollars on dollars, your money will lose its value due to inflation. But if you invest, then your money will make more money.
In other words, you should invest if you want your money to have value in the future.
How to Budget with the 50/30/20 Rule
The 50/30/20 rule teaches us to divide our monthly budget into just three categories. Thanks to this allocation, you will have money earmarked for every situation you will experience that month. But now the question is: how do you start budgeting this way?
To start using this method, you first need to know how much your monthly after-tax income is. The next step is to analyze your spending habits. A great tip is to review a credit card or bank statement over the last few months and see whether you overspent on clothing, shopping, or eating out.

If you want this to work, you must be honest with yourself and recognize that cutting some of those expenses can be replaced with better funds for your future self. That doesn’t mean you should give up your whole lifestyle; just consider cooking dinner at home for your friends once a week instead of going to the restaurant.
Here is a quick checklist before you start using this method for planning:
- Determine your after-tax income.
- Calculate your expenses on a monthly basis.
- Set your payoff and savings goals.
- Keep tracking your expenses and stay within the budget frame.
If you’re freelancing or running your own business, your after-tax income is the amount you earn in a month minus your business costs and the taxes you pay. For others with a steady paycheck, it will be easier. Their payslip will tell them how much lands in their bank account each month.
Budget Calculator
For this example, let’s say you calculate that your monthly after-tax income is $5000.
50% of $5000 is $2500, which goes for your necessary living expenses.
30% of $5000 is $1500, and it’s allocated for your “wants.”
20%, or $1000, of your monthly budget, is reserved for a savings account. This means $1000 of your take-home income should go toward growing your retirement savings, paying down credit card debt, or any other debt.
Pro Savings Tips
- We suggest you separate your accounts. Having three different accounts for three different categories will not give you the illusion of having more cash than you do.
- In addition to the standard monthly expenses, life brings us many others that are not so frequent but are undoubtedly mandatory. We have things like car payments or putting a down payment on a house in mind. Think ahead and try to predict what extra payments you will have soon and make adjustments to your plans.
Is the 50/30/20 Rule Right for You?
The biggest advantage of this budgeting method is that you can use it whatever your net pay is. You just need to calculate your income and break it into three categories of 50, 30, and 20 percent.
Another advantage of this strategy is that it forces you to pay at least the minimum debt. Failure to pay at least the minimum amount would negatively affect your debt by charging you additional money in interest.

Some people prefer a less detailed budget plan, while others cannot cope without a specific system, but both can benefit from this rule since it’s really adaptable. People who choose to monitor only three big categories can be more focused on fine-tuning finances instead of overthinking each expense. On the other hand, others like to have a detailed list of expenses for each category and want to know exactly how much they spent at the grocery store and how much they spent on new clothes.
Depending on your preferences and lifestyle, you will find this rule of thumb helpful. The best part is that you can try and have nothing to lose.
But keep in mind that any method of savings requires a good money mindset, discipline and money management practice.
When the 50/30/20 Rule Doesn’t Work
Some financial experts argue against the 50/30/20 rule, saying that it is not efficient for people with higher monthly incomes. In this case, they say, this rule of thumb calls for too much spending on wants versus needs, savings, and debt repayment.
Another concern is that the percentage of the allocated payment for each category isn’t appropriate. For example, for people in New York, San Francisco, and other areas with a high cost of living, 50% of their income for housing probably won’t be enough.
Before starting this practice, you need to discover where you are now and how you should relocate those funds appropriately. You can be in a situation where you need just 20% for your fixed expenses but 60% for your wants. Whatever the numbers are, it does not mean that you cannot use this method for personal finance. This budget rule is available to make minor incremental adjustments from time to time.
If perhaps an allocation of 40/30/30 seems more likely to suit your monthly expenses, go with it! It is crucial to understand the basic rules to go forward with your financial goals, but there is freedom to find the option that works for you.

We can help you SAVE MONEY
You’ve tried everything, but nothing can make you reach your savings goal. We get that.
We know how hard it is to save money and be consistent with your goal. We know because we had $140,000 in debt.
The problem isn’t with you. You just need a better strategy and a little push.
But we also know how to save money to erase debt and take the first step toward financial freedom. We’ve prepared the Pay Yourself First Challenge so you can learn that too!
In this challenge, you will get everything you need to save your first $500. By the end of those 4 weeks, you’ll have the foundation of your financial freedom right there in your pocket.
Today is the perfect time to leave your bad money habits behind and start a new chapter!
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