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The 50/30/20 Rule: A Simple Way to Split Your Pay

4 min read

Summary: The 50/30/20 rule is a rule of thumb that divides your take-home pay into needs, wants and savings. Here is how it works, and why it is only a starting point.

What the rule says

Take your pay after tax and other deductions, which is the money that reaches you. Then split it three ways:

• 50% for needs
• 30% (at most) for wants
• 20% for savings and debt payments

The US Consumer Financial Protection Bureau (CFPB) describes the same split as a common rule of thumb. Its worksheet writes it as "50/20/30" and says to spend no more than 30 percent on wants. The order of the numbers is different, but the split is the same. It is not a law and not a promise of anything. It is a way to check whether your spending looks balanced.

What goes in each group

Needs are the things you have to cover. The CFPB lists mortgage or rent, food, clothing, transportation, utilities and child care.

Savings and debts include credit card payments, retirement savings and emergency savings.

Wants are everything else: the things you choose to spend on.

Not every item is easy to place. A teaching guide from the CFPB suggests asking yourself, "Do I need this?" It also says that covering your needs before you spend on wants is a wise habit, and that reasonable people may answer differently.

How to try it in four steps

1. Find your take-home pay for the month.
2. Track a month of spending, so you know where your money goes now.
3. Sort each item into needs, wants, or savings and debts. Add up each group.
4. Compare each total with the 50, 30 and 20 shares.

An example

This is an example with made-up amounts.

Take-home pay: 2,000 per month.

Now say your real spending is 1,300 on needs, 450 on wants and 250 on savings and debts. The needs group is bigger than the rule suggests, and savings is smaller. That does not mean you are doing it wrong. It shows you where your money goes, so you can decide what to do about it.

When the rule does not fit

The CFPB says that people sometimes find rules of thumb like this hard to apply to their own lives, and that you can decide on your own rule instead. If rent takes a large share of your pay, a 50% needs group may not be realistic.

Here is one way to make your own rule, based on the CFPB worksheet:

1. Track everything you spend for a month.
2. See what share of your pay goes to needs, to savings and debts, and to wants.
3. Choose a weekly or monthly limit for wants, as a number, such as "no more than 120 a week".
4. Write it down and keep it somewhere you can see it.

A clear limit on wants is easier to follow than a vague plan to "spend less".

Keep in mind

• The rule works from take-home pay, not from your pay before tax.
• It is one tool. Your own situation matters more than any percentage.
• Small steps are fine. Any move toward your goal is progress.