How to Manage Money Using The 50/30/20 Rule

The 50/30 rule is a great way to make sure you are getting the most for your money. It is a method of splitting your money into three buckets: essentials, wants, and savings, so your income goes towards paying bills or debt while also leaving some extra at each place!.

Everyone needs the proper budget, so in this article, we will cover:

  • What is the 50/30/20 rule?
  • How to budget with the 50/30/20 rule?
  • Cases when this budget rule doesn’t work and its alternatives;
  • How you can manage financial independence.

What Is The 50/30/20 Rule?

The 50/30/20 budgeting rule tells you to divide your after-tax income into three spending categories:

  • Fixed expenses (or essentials) – 50% of your monthly income should be in this bucket
  • Flexible expenses (or wants) – 30%
  • Savings – 20%

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The Backstory of The 50/30/20 Rule of Thumb

A Harvard law professor, Senator Elizabeth Warren, coined the term 50/30/20 rule. With her daughter, Amelia Warren Tyagi, they 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 the future and sudden situations.

Let’s dig into more detail to three spending categories.

Fixed Expenses

The idea is to put 50% of your after-tax income into this category. Its also called Needs, and it involves:

  • Housing,
  • Groceries,
  • Utilities,
  • Health care,
  • Transportation.

Housing can include mortgage rent, taxes, insurance, and homeowners association fees (HOA dues).

These five categories are our essential needs – we need the roof over our head, 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 will spend more money on housing, but they can walk or cycle to work, so their transportation expenses are low if none. It’s more about total sum than individual cost. Your challenge is to stay within 50% of your income frame.

Flexible Expenses

The 30% of your monthly after-tax income is reserved for this category. Wants or flexible expenses depends on your lifestyle, age, and monthly income, but we want to make an extensive list of things that can be covered:

  • Child-care
  • Health insurance
  • Personal (refers to home security, mobile phone, internet, cable TV, Netflix, grooming, clothing, travel, gym memberships, fun money, etc.)
  • Education
  • Debt payments (credit card debt and loans)

Even though child-care and health insurance aren’t optional as buying handbags, we still get to choose how much we are willing to pay.

Most of the other things in this list are not essential for living, but that doesn’t mean we can’t enjoy them. We need to truly understand our income and spending habits to manage money better and achieve our financial goals.


The remaining 20% of your monthly after-tax income goes to savings and debt repayment, the most important category. Although it should be your emergency fund, it can also be the funds you use to invest and 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 are crucial but so is investing because, in that way, your money is making money. In other words, they are investing supports you to make more money instead of just keeping it.

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How to Budget With the 50/30/20 Rule?

The 50/30/20 rule allocates your monthly budget into only three major categories. Thanks to that, you have money earmarked for every situation whenever you want to do something new or even invest.

To start using this rule of thumb, you need to know how much your monthly after-tax income is.

Next, you should analyze your spending habits. A great tip is to go through a credit card or bank statement over the last few months and see whether you overspent with clothing shopping or eating out. Be honest with yourself and recognize that cutting some of that expenses can be replaced for better funds for your future self. That doesn’t mean you should waive your whole lifestyle, just consider cooking home dinner for your friends once a week instead of going to the restaurant.

Here is a quick checklist before using this method for budgeting:

  1. Determine your after-tax income.
  2. Calculate your expenses on a monthly basis.
  3. Set your payoff and savings goals.
  4. Keep tracking your expenses and stay within the budget frame.

If you’re working as a freelancer or running your own business, your after-tax income is the amount you earned in a month, minus your business costs and minus taxes you pay. For others with a steady paycheck, it will be easier. Their payslip will tell them how much lands on their bank account each month.

Budget Calculator

For this example, you calculate that your monthly after-tax income is $5000.

50% of $5000 is $2500, and it goes for your necessary living expenses.

30$ of $5000 is $1500, and it’s allocated for your discretionary spending.

$1000, or 20% 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 or paying down credit card debt or any other debt.

Extra 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 not so frequent but are undoubtedly mandatory. We have in mind things like repairing your vehicles or putting a down payment on a house. Think ahead and try to see what are some extra payments you will have soon and make adjustments with your plans.

Is the 50/30/20 Rule Right for You?

The great advantage of this budgeting method is that you can use it whatever your net pay is. Just calculate your income and break it into three categories with 50, 30 and 20 per cent.

Another advantage of this strategy is that it forces you to pay at least the minimum debt. Failure to spend at least the minimum debt 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.

Thus, only three categories to track for many people will be beneficial because they will be more focused on fine-tuning finances instead of getting stuck with each expense.

On the other hand, for others might be harder to find ways to develop their budget because of the shortcoming of details.

Depending on your preferences and lifestyle, you might find this rule of thumb helpful or even disadvantageous, but in both cases is worth trying. You have nothing to lose.

Where the 50/30/20 Rule Doesn’t Work

Some financial experts argue against the 50/30/20 rule 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 or savings and debt repayment.

Another concern is that the percentage of the allocated payment for each category isn’t appropriate. For people in New York, San Francisco or other areas with a high cost of living, 50% for housing might not be enough.

This budgeting method is not as straightforward as these critics pointed out. For people with higher income, this rule can be 50/20/30, as some refer to it. Therefore, they will pay less on flexible expenses, and more money will go toward savings and debt.

Before starting this rule of thumb, you need to discover where are you now and how should you relocate those funds appropriately. You can be in a situation to 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 allocation 40/30/30 seems more likely to suit your monthly expenses, go with it! It is crucial to understand the basic rule to go forward with your financial goals, but there is the freedom to find the best option for you.


Numerous people have tried this budgeting method and didn’t find it appealing. We are all different individuals, and lucky for us, there are plenty of options to choose from that one may put more money into emergency savings. Comparably with the 50/30/20 rule is the zero-sum budget rule.

Zero-sum Budget Rule

A zero-sum budget is a method that requires you to treat your savings and investments like all your other monthly bills. In that way, you will undoubtedly pay yourself every month, without excuse. The main idea behind these two strategies is the same, but the approach is different. The zero-sum budget requires you to give each dollar a job, meaning you need to track every penny you spend. This strategy is maybe better for people who need more structure and details in their budget plan.

Envelope budgeting

The envelope method determines you to use a prearranged amount of cash as your spending pool, nothing more. Even though card swiping is tempting, this strategy doesn’t let you succumb to it.

What Are We Doing After Saving Money?

Whether you choose to follow the 50/30/20 rule or any other rule of thumb, it is essential to know that saving money is not the last step in your financial journey.

The whole point is to make an emergency fund, but because of inflation, the money value is constantly changing, and the cash we have now will not be the same in future, as well as it is not the same as in the past.

Of course, it is crucial to save money, but when you save it, you don’t want your savings to be just sitting in the bank account. Instead, we want our money to be able to make more money. Since we don’t buy a car, keep it in a garage, and never drive it, we don’t want to do the same with our savings.

In money’s nature is to keep moving and continue building your wealth. A fantastic way for your savings to manage more cash is to put it inside the cash-value life insurance.

Cash-value Life Insurance

Cash-value life insurance contains both savings components, in which cash value accumulates and permanent death benefit coverage. Thanks to the cash savings component, policyholders can draw and borrow money.

As a policy owner, you can pull cash from your account to pay unpaid premiums, supplement retirement income or repay existing debt.

Several options are available to choose:

  • Whole life insurance
  • Variable life insurance
  • Universal life insurance
  • Variable universal life insurance
  • Indexed universal life insurance

Whole Life Insurance Policy

Insurers determine fixed-rate, and cash value is growing at that. Whole life insurance has fixed premiums, and additionally, the cash value is earning interest similar to other savings accounts and is designed for a high cash value. After that, you move to the point where you decide what are you going to do with the funds to start creating rates of return.

Manage the Financial Independence

Owning whole life insurance is the first step towards your financial freedom and financial protection. If you choose to use the Infinite Banking Concept, you can build your wealth while borrowing and repaying money deposited in your policy’s cash value account.

This concept involves three steps:

  • Overfunding a high cash value whole life policy with after-tax funds
  • Accumulation of tax-free cash value throughout the years you owe the policy
  • Tax-free loans took out against your whole life insurance policy’s cash value

If you follow these simple steps and implement the over-funded life insurance into your financial products, you will create your own bank. You are becoming your own banker without traditional loans, fees and high-interest rates.

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Final Thoughts

Key takeaways are:

  • The 50/30/20 rule is a simple tool anyone can use and adjust with their lifestyle and financial goals
  • This method is allocating your budget to appeal to every aspect of your financial lives
  • The rule of thumb stipulates how much money you will spend in each category

Spending a little extra time determining your costs and categorizing them will end up with your first budget plan.

Your budget plan will lead you toward achieving your savings goal. After that, it is time to keep your cash moving and start building wealth by putting your savings into a Whole Life Insurance policy.

We teach people how to manage their personal finance and be experts in life insurance here in Wealth Nation.

If you want to become a master of your finances, consider signing up for our premium membership. We are looking forward to seeing you at the Wealth Nation community!