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If you’re struggling to budget or don’t want to spend time on complicated spreadsheets and budgeting programs, a simple set of rules can be helpful. One of these is the 50/20/30 rule, which uses just three budget categories to help you prioritize your spending.

We spoke to Xavier Epps, a personal finance expert and owner of XNE Financial Advising, about this plan and how it can be implemented to help people manage their finances effectively.

What Is the 50/20/30 Plan, and How Does It Work?

The 50/20/30 approach is a simple budgeting plan that relies on three categories, or pots, of money, into which you put your net pay (your money after taxes):

  • Fifty percent is used for your living expenses, including your rent or mortgage payments, your utility bills, your transportation costs and your monthly groceries. This pot is just for paying for the things that are essential for living your life.
  • Twenty percent is put aside for savings and repayments on debt, such as a car loan or student loan. If the interest rate on your debt is higher than you’d receive for saving (this is usually the case), you should prioritize paying the debt first.
  • The remaining 30% is flexible. This money is for things you want but might not need, such as leisure activities. If money is tight or an unexpected need crops up, you might need to supplement your other pots with money from this pot.

It is generally accepted that the 50% and 30% pots are maximums – you want to spend no more than these percentages on these areas – while the 20% on financial goals is a minimum: If you can save more, you should.

What Are the Advantages of Using the 50/20/30 Plan?

The key advantage of using this plan for your finances is that it is simple and clear, forcing you into a regular habit of budgeting.

Epps commented, “Having an outline for how your finances should be allocated is not only helpful but extremely easy to follow once established. Including a forced percentage for savings allows you to build up emergency funds for the unexpected in life.”

Because there are only three spending categories, you don’t have to spend a lot of time managing your money, and you still have relatively large amounts of freedom over where you choose to spend your money. This can be a big advantage for people who find traditional budgeting programs, with categories for almost everything under the sun, too restrictive and time-consuming.

What Are the Disadvantages of Using the 50/20/30 Plan?

The biggest disadvantage of using the 50/20/30 rule is that it doesn’t suit every level of income.

“It can be challenging to stay within the allocated percentages if your credit score is weak since any loan payments will eat up a considerable amount of your finances,” says Epps.

If you’re on a low income and have outstanding loans, you may need to spend more than 50% on essentials and more than 20% on paying your debts. Finding even a small percentage for leisure activities can be difficult.

Alternatively, your financial situation may require you to save more than 20% to cover your retirement costs; in this scenario, the rule may encourage you to spend too much on leisure activities when you should be saving more. If your retirement costs come out of your paycheck before you receive it, this is less of a concern because it isn’t part of your net pay.

If your income is high, spending even close to 50% of your budget on essentials and 30% on leisure might not be wise, and you’d be better off saving more. A one-size-fits-all plan doesn’t take into account your unique situation.

Getting Started: How Can You Implement the Plan?

To get started with the 50/20/30 plan, you should first examine your recent spending:

“Itemize your most recent financial records and place them into the three buckets – essentials, savings and debts, and personal spending,” explains Epps. “After itemization is complete, calculate your three percentages. Compare the percentages to the plan; how close are you?”

Once you’ve reviewed your current spending, you can assess what you need to do in the next month to meet the requirements. If you haven’t budgeted before, it’s likely you won’t meet the requirements; most people spend too much on leisure and not enough on saving or paying down debt.

Remember that some items you think are necessities, such as cable TV, are actually luxuries and not something you need. What could you cut out to help you meet your budgeting objectives? Could you switch providers for your utility services to save money?

But Is It Realistic?

One of the most commonly mentioned issues with this approach to budgeting is that it doesn’t suit all income levels. Although this is true (see our “cons” section), the fundamentals behind the plan are solid: By having a simple set of rules, you can ensure that your spending remains sensible.

If the 50/20/30 plan isn’t quite right for your income level, you should adjust the percentages to suit your situation and income. For example, if your income is low, it might be realistic to aim for 60/30/10 and then later adjust to 50/20/30 if your income improves. Individuals with a high income might instead opt for 40/40/20. The principles are still the same; only the numbers have changed. Set a goal that’s realistic yet challenging.

Will you be able to achieve your financial goals using this plan? That depends on you: The biggest barriers to your success are your own established spending habits.

“Like most money management techniques, you have to be disciplined and want to seek help,” says Epps. “If that’s you, the 50/20/30 budget could be a great way to achieve your financial aim.”

If you’re not sure a strict 50/20/30 budget would work for you, there are still plenty of ways to budget. Got any tips on how you structure your budget? Share them in our comment section.

This Post Has 10 Comments

  1. I have a Section 8 voucher I’ve been on the program about 8 or 9 years now and I want to become a First Time Home buyer I need someone to walk me through the process cuz I don’t know what I’m Doing. I’m a Single mom of 4 and my only income is SSD and Child Support.

    1. Hi Jennifer:

      We would be happy to walk you through the process of the application. If you give us a call at (800) 442-4383, we can get you started over the phone. Have a great day!

  2. Yes I have a voucher I’ve been on section 8 for 4 or 5 years now and I want to become one person home buyers I have a voucher I need somebody to do contact me to walk me through it cuz I don’t know what I’m doing thank you very much wonderful day

    1. Hi Jamie:

      Broadly speaking, your voucher works like any other source of income and we can use it toward qualifying you for a mortgage. The documentation we need can vary depending on the type of loan you’re trying to qualify for, but I recommend speaking with one of our Home Loan Experts at (800) 442-4383 and they can walk you through the process and help you figure out how much you qualify for. Thanks!

  3. In your list of essentials, I think it is important to include insurance costs. This will make people aware of costs associated renter’s, home, automobile, and health insurance.

    In terms of savings, it would be useful to remind people of investments they can possibly make through their company (i..e. 401K of stock plans. It would also be useful to factor these into the Savings category, when the money is being directly withdrawn from their paycheck.

    It is also worth noting that paychecks can be split among different bank accounts. Some might be limited to 2 different accounts and others more. If people will have their paychecks deposited in this manner, they will have fewer category transfers that they themselves will be responsible for making.

    Thanks for the information. I thought that these options might make things clearer to some people.

  4. Good recommendations for getting finances in order. The key is being flexible to handle unexpected items, such as medical issues and adjusting your formula where needed. Once major obligations are paid off, i.e. auto loans, etc. then move those monies into savings.

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