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Financial Planning

50/30/20 Rule: A Simple, Effective Budgeting Tool

Deborah Williams

Why It Matters:

  • Historically, Americans have been among the world’s worst savers. By adopting a 50/30/20 lifestyle, you can make it easier to stick to a budget.
  • Using this simple budgeting tool can help you avoid overspending and build more structure into your spending habits.
  • Americans are living longer today than ever before. Setting aside 20% of your income for retirement is key to ensuring your senior years are “golden.”

As an investor, you may be familiar with the 60/40 rule. Long recommended by financial advisors, this popular guideline encourages investors to put 60% of their investment “eggs” in a riskier (and potentially higher return) stock “basket” and 40% in a more stable (and typically lower return) bond “basket.” As investors near retirement, the bond portion should increase, with the stock portion decreasing correspondingly, along with their age. 

But have you heard of the 50/30/20 rule — a rule that aims to help you manage your money more efficiently and effectively? Though the rule’s name may be new to you, its creator, Senator Elizabeth Warren, likely is not. Together with her daughter, Amelia Warren Tyagi, she introduced this powerful budgeting concept in their 2005 book “All Your Worth: The Ultimate Lifetime Money Plan.”

In a nutshell, the idea is this: To stay on track toward meeting your financial goals, you should set aside 50% of your pre-tax income for “needs.” Another 30% of your income before taxes should be devoted to “wants.” And the final 20% should be earmarked for savings.

50%: Needs

Though different people may define “needs” in different ways, we can probably all agree that needs are the necessities of life. They are your “must haves,” for example:

  • Mortgage or rent payments
  • Utility bills (gas, electricity, water)
  • Transportation (including fuel and car maintenance)
  • Insurance (life, health, home, car)
  • Basics of living (groceries, clothing, and other supplies)
  • Minimum loan payments

And, in an age when remote working and schooling have become more common, a personal computer, smart phone, and internet access probably could be added to this list.

30%: Wants

Now that you’ve taken care of the basics, you can turn your attention to your “wants.” Unlike your needs, your wants will be more personalized. They are the non-essentials that you choose to spend your money on — the niceties that you could live without but that add enjoyment to your life. Wants may include:

  • Dining out
  • Travel/vacations
  • Entertainment (movies, theater, concerts, sporting events)
  • Electronics (gaming console, virtual reality headset)
  • Memberships (gym, museums)
  • Hobbies
  • Gifts
  • Charitable contributions
  • Streaming subscriptions (Netflix, Amazon Prime, HBO)
  • Grooming/self-care (hair, skin care, makeup, nails, massage)
  • Non-essential clothes (including accessories)
  • Specialty groceries (including alcohol)

20%: Savings

Though the smallest portion of your after-tax income should be allocated to savings, that 20% is critical to your financial well-being. True, personal savings soared early in the pandemic as Americans isolated at home, curtailed their spending, and banked their government economic stimulus checks. But historically, Americans have been among the world’s worst savers. At the end of 2020, the personal savings rate in the U.S. amounted to 13.7%.1 Meanwhile, total consumer debt rose to nearly $14.6 trillion as 2020 came to a close; of that, $820 billion was credit card debt.2

Most financial advisors recommend that you focus first on building up an emergency fund. A useful rule of thumb is to stash three to six months of your pre-tax income in your emergency fund in case you lose your job or suddenly face an unforeseen (and unbudgeted for) event. Once you’ve accumulated enough money in your emergency fund, you can begin saving for your short-term objectives, for example, a down payment on a new home, as well as your intermediate- and long-term financial goals like a child’s college education and retirement.

Getting Started

One of the most appealing features of the 50/30/20 rule is that you don’t need to be a financial whiz to get started on your budgeting plan.

First, take a look at your most recent paystub to calculate your after-tax income; for workers who are not self-employed, start with the amount of your paycheck. To that, add back any non-tax deductions such as your health insurance plan and 401(k) plan (you have established a 401(k) or other retirement plan, haven’t you?). Then, multiply that figure by 0.5 (50%), 0.3 (30%), and 0.2 (20%) to determine how much money should be added to each of your budgeting buckets. It’s that easy!

Of course, there are plenty of budgeting apps available if you eventually want to put together a more detailed and comprehensive budget. But this method will give you a big-picture overview of your monthly spending habits and allow you to make adjustments where necessary. What’s more, you will become more mindful of your spending behaviors, helping you to avoid overspending and stay on course.

Need More Help?

The 50/30/20 rule is a simple and effective tool to help you manage your budget and build up your savings over time. But, like many Americans, you may need the guidance of a professional when it comes to planning for your longer-term financial goals such as retirement (an important purpose of your 20% savings bucket).

A financial advisor can work with you to design a personalized investment plan that takes into consideration your willingness to take risk with your retirement savings dollars (your risk tolerance) and when you want to begin taking withdrawals from your retirement accounts (your time horizon). Based on this information, a financial advisor can develop a comprehensive, written investment plan based on your objectives and recommend suitable investments — for example, mutual funds, exchange-traded funds, and insurance products like annuities — that align with your risk tolerance and time horizon. What’s more, your financial advisor can help you choose appropriate investments from your company 401(k) plan lineup.

Given that Americans are living longer today than previous generations, a well-thought-out investment plan for your golden years is essential. Of course, financial advisors always recommend starting early to take advantage of the compounding effect of saving over time. But even if you’re late to the party, a financial advisor can develop a customized road map to help you reach your retirement destination.

Things to Consider:

  • The 50/30/20 rule is a guideline for planning your budget only. So, you’ll want to supplement it with some method of tracking your spending to ensure you’re remaining within those guidelines.
  • Though the 50/30/20 rule helps you structure a sound budget, keep in mind that the recommended percentages for each bucket won’t work for every saver. Some lower-earning families may find it difficult to direct 20% of their income to savings, and families residing in areas where the cost of living is high may not be able to keep their needs spending within the 50% threshold.


1 “Personal Saving Rate in the United States From 1960 to 2020,” statista.com, March 2021

2 “Household Debt Rises to $14.6 trillion Due to Record-breaking Rise in Mortgage Loans,” cnbc.com, February 2021


Transamerica Resources, Inc. is an Aegon company and is affiliated with various companies which include, but are not limited to, insurance companies and broker dealers. Transamerica Resources, Inc. does not offer insurance products or securities. The information provided is for educational purposes only and should not be construed as insurance, securities, ERISA, tax, investment, legal, medical or financial advice or guidance. Please consult your personal independent professionals for answers to your specific questions.