Please explain 50/30/20 % budgeting rule (2024)

50/30/20 is

50% after tax income to needs
30% after tax income to wants
20% after tax to savings

It is a barometer for folks who currently have no barometer.

Take your paycheck, add in all voluntary deductions (401k, health insurance, etc) to get your total after tax income. Then multiply by 50/30/20 to get your ratios.

First, Warren's original rule was 30 to wants and 20 to savings, but if you can flip that, great!

Apply the numbers to your after tax income. Then figure out how much you need for housing, utilities, transportation, food, insurance and clothing. If that is 50% or less, everything else is wants. Make sure that you include sinking funds for both needs (ie roof repair) and wants (an upcoming vacation or gifts).

Like many guidelines, it is a good place to start. I doubt there is anyone who has it dialed in that precisely. Once you choose a savings rate, do everything you can to automate it.

As for your reference to tax deferred and taxable, follow the Priority of Investments in the wiki. That is still a guideline, but works well for a high percentage of cases, independent of the actual savings rate.

And note that Warren & Tiyagi counted any budget item that improved your Net Worth as "savings." So that included the portion of your mortgage payment that goes to principal, and any payment against debt.

One summary of the categories that I saved:

• Needs are housing, utilities, health care, transportation, gas, insurance, basic groceries, basic phone plan and basic clothing.

• Savings includes retirement accounts, emergency savings, and debt repayment.

• Wants are everything else: cable TV, upgraded cell phones, haircuts, swimming lessons, dog food, tithing/charity, books and magazines, vacations, and food and clothing beyond the basics.

Northern Flicker wrote: ↑Sat Jul 01, 2023 6:29 pmDog food is a need unless it does not exist as an expense at all.

I think their point was that pets are not a need, and they consume resources if you have them. So don't have them if you have not planned for them, and cannot afford them.

Sandi_k wrote: ↑Sat Jul 01, 2023 6:58 pm

Northern Flicker wrote: ↑Sat Jul 01, 2023 6:29 pmDog food is a need unless it does not exist as an expense at all.

I think their point was that pets are not a need, and they consume resources if you have them. So don't have them if you have not planned for them, and cannot afford them.

It either can be a need or not an expense at all. A want is a discretionary expenses that varies from month to month if needs turn out to be higher some months. If you don't own a dog, the expense is not in the want bucket of your budget. It is not a part of the budget at all unless and until you decide to acquire a pet, at which time the associated expenses become part if the need bucket.

If someone does not own a Ferrari, the fact that they cannot afford it does not make the insurance on it a want in their budget.

Northern Flicker wrote: ↑Sat Jul 01, 2023 8:25 pm

Sandi_k wrote: ↑Sat Jul 01, 2023 6:58 pm

Northern Flicker wrote: ↑Sat Jul 01, 2023 6:29 pmDog food is a need unless it does not exist as an expense at all.

I think their point was that pets are not a need, and they consume resources if you have them. So don't have them if you have not planned for them, and cannot afford them.

It either can be a need or not an expense at all. A want is a discretionary expenses that varies from month to month if needs turn out to be higher some months. If you don't own a dog, the expense is not in the want bucket of your budget. It is not a part of the budget at all unless and until you decide to acquire a pet, at which time the associated expenses become part if the need bucket.

If someone does not own a Ferrari, the fact that they cannot afford it does not make the insurance on it a want in their budget.

Wants and needs is not the same budgetary division as fixed and variable. Defining wants and needs is an important budgeting tool for people who are on the edge, but it is fuzzy. I would say pets and their associated expenses fall in the wants category, myself. A want can become an obligation, but that doesn't make it a need. Nobody needs a second home, but once you purchase one, you have responsibilities for it, such as paying the taxes.

But, for the sake of this thread, if you count it as a need and still keep the needs under 50%, you are following the guideline.

A want is a discretionary expense that you can make if it does not take away from the savings bucket in the stated paradigm. I would view acquiring a pet as an aspirational need not yet created. Buying a new car with a loan is similar. If you need a car, the new car being financed stops being a want and becomes a need once the purchase is committed and the loan payment becomes one's liability. These are a 4th category that I would call an aspirational bucket.

I'm being nitpicky because it matters. Someone who is limiting needs to 50% may cause that to fail by making decisions like acquiring a pet or buying a new car when not necessary, causing their need budget to grow. Calling them "wants" does not acknowledge the impact on the needs budget.

Sandi_k wrote: ↑Sat Jul 01, 2023 6:58 pm

Northern Flicker wrote: ↑Sat Jul 01, 2023 6:29 pmDog food is a need unless it does not exist as an expense at all.

I think their point was that pets are not a need, and they consume resources if you have them. So don't have them if you have not planned for them, and cannot afford them.

For fun times, replace 'pets' with 'children'. Murky waters to swim in.

vkat wrote: ↑Sat Jul 01, 2023 3:35 pmHi,
I read about 50% of salary into needs/ 30% into investing and 20% into wants each year. Could someone please clarify how they calculate or budget using this rule. I am interested in knowing for gross income with investments in Taxable and tax deferred accounts.
- V

Here's an example of the 50/30/20 for our household and the categories pertinent to our situation up until the end of this year (things will change as my wife recently retired)...

CyclingDuo

CyclingDuo wrote: ↑Sun Jul 02, 2023 9:40 am

vkat wrote: ↑Sat Jul 01, 2023 3:35 pmHi,
I read about 50% of salary into needs/ 30% into investing and 20% into wants each year. Could someone please clarify how they calculate or budget using this rule. I am interested in knowing for gross income with investments in Taxable and tax deferred accounts.
- V

Here's an example of the 50/30/20 for our household and the categories pertinent to our situation up until the end of this year (things will change as my wife recently retired)...

CyclingDuo

Thank you for sharing. I was looking for something like this.

Sandi_k wrote: ↑Sat Jul 01, 2023 4:16 pmAnd note that Warren & Tiyagi counted any budget item that improved your Net Worth as "savings." So that included the portion of your mortgage payment that goes to principal, and any payment against debt.

One summary of the categories that I saved:

• Needs are housing, utilities, health care, transportation, gas, insurance, basic groceries, basic phone plan and basic clothing.

• Savings includes retirement accounts, emergency savings, and debt repayment.

• Wants are everything else: cable TV, upgraded cell phones, haircuts, swimming lessons, dog food, tithing/charity, books and magazines, vacations, and food and clothing beyond the basics.

Thank you for clarifying.
So is this budgeting rule for needs/ wants/ savings or Fixed expenses/ variable expenses/ savings?( like Cycling duo has explained below)

Northern Flicker wrote: ↑Sat Jul 01, 2023 6:29 pmDog food is a need unless it does not exist as an expense at all.

Dog food is poison. It is much better to prepare food for your animals yourself. Alas is it more time consuming and more expensive but worth it.

vkat wrote: ↑Sun Jul 02, 2023 10:02 am

Sandi_k wrote: ↑Sat Jul 01, 2023 4:16 pmAnd note that Warren & Tiyagi counted any budget item that improved your Net Worth as "savings." So that included the portion of your mortgage payment that goes to principal, and any payment against debt.

Thank you for clarifying.
So is this budgeting rule for needs/ wants/ savings or Fixed expenses/ variable expenses/ savings?( like Cycling duo has explained below)

The authors who derived this plan say Needs v Wants v Savings.

The change to Fixed v Variable v Savings is Cycling Duo's adaptation. And I would say it's not the same - groceries are Needs, even though they are variable in cost. Same with utilities.

MishkaWorries wrote: ↑Sun Jul 02, 2023 10:19 am

Northern Flicker wrote: ↑Sat Jul 01, 2023 6:29 pmDog food is a need unless it does not exist as an expense at all.

Dog food is poison. It is much better to prepare food for your animals yourself. Alas is it more time consuming and more expensive but worth it.

Dog food you prepare yourself is still dog food.