The 50/30/20 Budget: A Simple Way to Split What You Earn

Many budgets fail because they ask too much: a limit for every kind of spending, checked every week. The 50/30/20 budget asks for three numbers. It won’t suit everyone, but it’s a good place to start if you’ve never kept a budget, or have given up on one.

This article is general information, not financial advice.

The Split

The rule comes from Elizabeth Warren and Amelia Warren Tyagi’s book All Your Worth (2005). It divides your income after tax into three parts:

• 50% for needs: what you must pay whatever happens, such as rent or mortgage, utilities, groceries, insurance, and getting to work.
• 30% for wants: everything you choose, such as eating out, holidays, subscriptions, and hobbies.
• 20% for savings and debt: an emergency fund, retirement saving, and paying down debt.

On a take-home pay of $4,000 a month, that’s $2,000 for needs, $1,200 for wants and $800 for saving.

Why It Works

The split doesn’t tell you what to spend on, only how much room each kind of spending has. That makes it easy to remember and quick to check. The 50% cap on needs is the heart of it: when fixed costs grow past half your income, there’s little left to absorb a surprise, and every month feels tight however careful you are.

Adapting It

The percentages are a starting point, not a rule:

• Where housing is expensive, needs can take more than half. Then the question becomes where the difference comes from, and the honest answer is usually wants, not savings.
• With high-interest debt, putting more than 20% towards paying it off often beats saving, since a credit card’s interest is usually higher than what savings earn.
• On a low or irregular income, timing can matter more than percentages. The U.S. Consumer Financial Protection Bureau’s cash flow budget starts from when money arrives and when bills are due, week by week.

Tracking It

A budget only helps if you can see what you actually spent. The Consumer Financial Protection Bureau’s four steps are a good outline: list where your money comes from, see where it goes by sorting your spending into categories, note when your bills are due, then set a budget and revisit it when things change. Looking at one month at a time keeps it manageable.

Following It in Kaizora

In Kaizora, you add your accounts (checking, savings, credit cards, …) and log or import their transactions, each with a category you choose, such as Housing, Groceries, or Eating Out. A move between your own accounts takes the Transfer category, so it nets to zero rather than counting as spending. Importing Bank Statements walks through importing a CSV.

• Net Cash Flow is money in less money out, by day, week, or month. Break it down by category to see what each category took.
• The Kaizora Financial Health Score counts your savings rate among its components, beside your emergency fund, credit card debt, and net worth trend.

Kaizora doesn’t sort categories into needs, wants, and savings for you, so choose categories that make the split easy to read. For the difference between what flows through your accounts and what you own, see Net Worth vs Cash Flow.

The Short Version

• 50% of take-home pay for needs, 30% for wants, 20% for savings and paying down debt.
• Keep needs to about half, so there’s room for surprises.
• Adapt the split to your costs and debts; the habit of checking matters more than the exact numbers.
• Sort spending into categories and look at it one month at a time.

Sources

• Warren E, Warren Tyagi A, All Your Worth: The Ultimate Lifetime Money Plan (New York: Free Press, 2005).
• Consumer Financial Protection Bureau, Budgeting: How to create a budget and stick with it.
• Consumer Financial Protection Bureau, Your Money, Your Goals: Creating a cash flow budget.