50-30-20 Budgeting Rule

The Rule of 50-30-20 for Budgeting

A critical aspect of building wealth is ensuring you set enough aside for basic needs while prioritizing how much you need to save to reach your goals. But strictly living the bare minimum while only focusing on the future can lead to burnout and regrets that you didn't enjoy key phases of your life. The 50-30-20 rule tries to accommodate the 3 most important areas when it comes to budgeting.

The Rule

  • NEEDS - 50% of your take home income should go towards needs; things for survival (housing costs, utilities, food, gas)
  • WANTS - 30% of your take home income should go towards wants (cable/streaming service, vacations, going out)
  • SAVINGS - 20% of your take home income should go towards savings (emergency fund, investments for passive income, buying a home)

Keep in mind this rule is just a guideline and there are some important things to make note of when setting up a rule like this:

  • Under the needs category notice we list gas as an example, but it may be any form of transportation to get you to and from work. However, you buying a luxury car you cannot afford would not be considered something that should go towards your 50% "needs" budget.
  • For passive investors younger in age, say below age 30, I would strongly suggest trying to get "wants" down to even 20% (if not 15%); having this heard start, especially if still living with your parents can give a real boost to your savings down the line. For someone bringing home $50,000 per year, that's an extra $5,000 towards an emergency fund or total stock market index ETF where you can reinvest the dividends.
  • For the "savings" category, how much to split between emergency fund versus investments is highly dependent on your situation. If you're 25 living at home with your parents and work in a high demand field, you may feel fine putting more money towards investments and less towards an emergency fund. The one thing to absolutely not do, is not have any emergency fund. Sooner or later you will need one, so it's best to put something in that bucket even if it's 5% in the short-term.
  • Lastly, buying a home is not on everyone's list and not meant for everyone, so you'll have to decide if that money is more of a want or savings to be used as an asset later. Watch our video on YouTube about the benefits of buying a new home.