If you’re not into traditional budgeting, where you place all of your spending into rigid categories, then the 50/30/20 rule might be for you. 

This method of financial management is broken into three main sections: 50% needs, 30% wants, and 20% savings and investing. It’s designed to take a full picture of one’s monthly expenses in the most simple way possible and remove the nitty gritty details that can bog someone down with complications.

So, in theory, if you make $5,000 a month after-tax, $2,500 should go to your needs, $1,500 to your wants, and $1,000 to your savings and investing goals. Let’s talk more about how this all works.

50%: Needs

The first section of the budget is devoted to your needs. Needs represent the essential items that allow you to survive such as:

• Mortgage/rent
• Groceries
• Healthcare
• Utilities
• Transportation
• Debt payments

While it seems like a simple solution, designating what is genuinely an essential need or not is more complicated than it looks. To set this budget up correctly, you need to hone in on your spending. An excellent way to frame necessary expenditure within the 50/30/20 rule is to phrase it as the following question: If you lost your job or source of income today, what spending would you still need to survive?

Even if you’re financially secure, these types of questions are critical to ask, as it brings us back to the basics of what is actually important or not. Stopping each morning for Starbucks might feel nice, but you can easily rack up more than $100 per month on coffee alone. In reality, you don’t need to drink Starbucks coffee. You could save hundreds, if not thousands of dollars per year by brewing your own coffee at home. 

If your needs take up more than 50% of your budget, then it’s time to consider cutting costs or finding ways to increase your income.

Generally speaking, housing and transportation are your largest expenses. Finding ways to decrease those significant expenses will help you come within budget. For example, if your car loan swallows $600 per month and you’ve recognized it as a painful expense, refinancing (if your interest rate is high) or selling it for a cheaper vehicle could free up a lot of extra cash per month. Cash that can be put elsewhere, such as investments.

Redirect funds you save towards savings or investments like real estate or stocks. Stocks are relatively inexpensive and easy to get into compared to real estate, but as we’ve said at BiggerPockets a billion times, it’s always the right time to start your real estate investment journey!

30%: Wants

The following 30% of your budget should be your wants.

Some wants are:

• Shopping
• Dining out
• Entertainment
• Nightlife
• Travel

This is the more controversial part of the budget. Critics would suggest that 30% of your budget should not be dedicated towards wants. Instead, 30-40% should go towards investments and savings, and as your money scales, the wants budget naturally increases. 

Say you do use 30% of your budget towards wants. Your goal should be to limit the amount you’re spending. 

An easy place to start is looking at your subscription services. Disney+, Hulu, Netflix, and Paramount+ are all excellent streaming services, but do you need to subscribe to every one of them?

You can also look at how much you spend on take-out and restaurants. For example, cooking four or five meals each week can save you a few hundred dollars at the end of the month.

Of course, just like the needs, if you can’t cut down on costs, you’ll need to increase your income to balance the budget. Going over 30% on wants is an easy way to recognize that you’re spending too much money.

Short Term Savings

You should include short-term savings in the wants category as well. Saving for a vacation, a new car, or a fancy computer are short-term savings goals that fall into the wants category. 

Whatever you’re saving for, you don’t want your long-term savings to be delayed because of short-term wants. Make the distinction between what is more important and keep a future-orientated attitude towards savings.

20%: Saving and Investing 

The last section of the 50/30/20 rule is to dedicate 20% of your after-tax income to savings or investments. We’ll always emphasize that it’s vital that you look out for your future self. 

While 20% might not seem like a lot, and in reality, it isn’t, any savings that you account for will put you in a better financial situation.

What type of savings make sense, then?

Saving #1: Emergency Fund

If you haven’t started one already, you need to save an emergency fund. This is an important goal for everyone. 

Aim for a starting fund of $2,000. After that, you can scale it to what you feel would protect you most.

Emergency funds are crucial buffers between you and the world. If you lose your job, your car breaks down, or your dog needs surgery, you’ll be liquid enough to pay your way out of trouble. 

Saving #2: Retirement Account 

Retirement accounts are also critical. According to a SimplyWise survey, 40% of Americans are worried that they’re not going to be able to retire, and the vast majority of Americans only have $65,000 in retirement savings. That’s certainly not enough to live off. 

Building your retirement early protects your future self. You might already have a 401(k) through your employer, but there are other options like a Roth IRA. Be sure to do your research on what works best for you.

Related: 401(k) vs. Roth IRA: Which is best for you?

Saving #3: High-Interest Debt

Some people also use this 20% to get a head start on paying off high-interest debt. While this is not ideal, it’s not a bad option if you’re overwhelmed with debt. Even $50 extra each month can shave years off of your debt payment day, depending on how much you owe.

Those are three savings you’ll need to be looking at. As for investments, these are the ones you’ll want to consider.

Investment #1: Real Estate

Real estate is one of the best investments to make. For one, real estate has a long history of stable, consistent appreciation, with few hiccups in between (i.e., 2008). Second, real estate is constant, as in, the home you buy will usually remain in place unless a natural disaster or something else occurs that damages or destroys the home. 

Finally, real estate is leverageable. While yes, you can trade stocks on margin, it’s risky. On the other hand, real estate can be acquired with a 20% downpayment. Depending on your financing terms, even less. There are also plenty of ways you can execute creative financing strategies.

Investment #2: Stocks

Another popular investment to make is in stocks. Compared to real estate, it’s much easier to get involved in stock investing. All you have to do is create a brokerage account, verify your identity, and get started.

Whether you plan on being an active or passive investor, note that long-term investments save a lot of money in taxes. While stocks are volatile compared to real estate, 30-year outlooks of stock indices show that stocks tend to appreciate over time.

Being Flexible with the 50/30/20 Rule

The simplicity behind the 50/30/20 rule makes it easy to make changes that fit your lifestyle. As we’ve discussed, one of the most common changes is switching out the 20% and 30% parts of the budget so that you’re emphasizing savings over wants. If you’re working on building your investment portfolio, it would be more beneficial to set aside 30% of your income for those projects, then spend 20% of your income on wants. 

Overall, the purpose is to create a truly balanced budget that equates to 100%. If you can lock in these numbers over a consistent period of time, then you should see real changes in your financial outlook.

The Bottom Line

The 50/30/20 rule is excellent if you want to try something other than traditional budgeting. It gives you ballpark numbers to spend on each category while still setting aside what you need to live life as you see fit.

While it might not make sense for an investor to apply the rule as is, the concept behind percentage buckets might be something worth considering. Perhaps you can try a 50/40/10 combination, favoring 40% in savings and investments. Or a 40/40/20 variety.

If it can help you achieve your goals, then it’s something worth considering.