The 50/30/20 rule: what it is and how to use it

Where the rule comes from

The 50/30/20 rule was popularised by Elizabeth Warren and her daughter Amelia Warren Tyagi in their 2005 book “All Your Worth”. The idea was to make budgeting easier by thinking in three big buckets instead of dozens of categories.

The three buckets: what goes where

Needs are the costs you can’t cut or need to live: rent or mortgage, building fees, utilities, internet, groceries, transport to work, health costs and the minimum payments on your debts.

Wants make life better but could go: eating out, coffee, entertainment, hobbies, travel, new clothes and most subscriptions. The line isn’t always clear: groceries are a need, but some of what goes in the basket is a want.

The savings bucket covers your emergency fund, savings goals, investments and any debt payments above the minimum, made to clear it early.

A worked example

Say your take-home pay is $4,850 a month. The rule splits it like this:

• Needs (50 percent): $2,425
• Wants (30 percent): $1,455
• Savings (20 percent): $970

Now the real costs: rent $1,600, fees and bills $335, installments $245, groceries $580, transport $290. Needs come to $3,050, about 63 percent of income. In that case it’s better to adapt the rule than to force it.

Adapting it when rent is high

In big cities rent alone can pass a third of take-home pay, which makes a 50 percent cap on needs unrealistic. A common fix is to raise the needs share (to 60 or 65 percent) and take the difference from wants. For the household in the example, something like 63/21/16 is realistic and still protects savings; the next section shows where those numbers come from.

When prices move quickly, recalculate your ratios after each pay rise or every three months. Keeping savings from dropping below about 10 percent is the step that makes the most difference over time.

Turning the ratios into a period budget

Ceres doesn’t sort a budget into needs and wants; it works with fixed costs, a savings goal and a period budget. Here are the example household’s numbers in those three lines:

• Savings goal: $800.
• Fixed costs: $2,250. Of that, $2,180 is needs (rent, building fees, bills, installments) and $70 is wants (subscriptions).
• Period budget: $4,850 − $800 − $2,250 = $1,800. Of that, $870 is needs (groceries $580, transport $290) and the other $930 is wants.

Added up, needs come to $3,050 (62.9 percent), wants to $70 + $930 = $1,000 (20.6 percent) and savings to $800 (16.5 percent): the household lives on 63/21/16. Over a 30-day period, $1,800 is $60 a day, of which $29 goes to groceries and transport and $31 to wants. The ratios tell you what to check at the end of the period; the daily allowance tells you what you can spend today.

Find your own ratio in 3 steps

• Sort the last three months of spending into the three buckets to find today’s ratio.
• Pick a target ratio and close the gap a few points a month, not all at once.
• Move savings automatically on payday, so the ratio holds without willpower.

Where the rule falls short

The rule is a compass, not a map. With irregular income the same ratio is hard to hit every month; it doesn’t deal with debt on its own; and the line between needs and wants differs from person to person. Above all, it doesn’t tell you how much you can spend day to day. Using the ratios as the plan and tracking spending alongside closes that gap.