50-30-20 Rule for Savings

50-30-20 rule for Saving

This a budgeting rule of thumb for how to separate your income.

50% to your needs

30% to your wants

20% to savings and/or debts

Wants are often called nonessentials, but these expenses allow you to personalize your budget. Whether it’s self-care or eating out, including some fun in your budget may make you more likely to stick to it.

While 30% may seem extravagant, the wants category is usually doing some double duty by including any upgrades you may wish to make in your needs section. While you may need a cell phone, getting the newest device or paying for a premium plan may be a want. You definitely need clothes, but you may opt to buy a special outfit or a more expensive brand.

​30% to Wants

Expenses that necessary for survival and basic well-being. These include housing, utilities, food, transportation, healthcare and childcare. While these needs may seem clear-cut, there’s still a significant amount of personal interpretation within this category. Some people can use public transportation, but others may need a personal vehicle.  A single parent may consider their life insurance premium to be an essential cost, while a person with no children may not.

​50% to Needs

​20% in savings and/or debt

Savings can include retirement contributions, an emergency fund, or a goal like homeownership or travel. If you are debt-free or your only debt is a low-interest mortgage, you may want to devote the full 20% of your net income to savings. If you have student loans or are carrying a credit card balance, you’ll need to decide how to split your savings and debt repayments. If you’re paying higher interest on loans than you can earn through savings, it may be wise to devote a larger portion to debt repayment.

One of the primary attractions of the 50/30/20 budget rule is its simplicity. Consider an individual who takes home $5,000 a month. Applying the 50/30/20 rule would give them a monthly budget of:

• 50% for mandatory expenses = $2,500

• 20% to savings and debt repayment = $1,000

• 30% for wants and discretionary spending = $1,500

​Crunching the Numbers

• How realistic do these percentages seem? It depends on the category. In our example, necessities include:

  • Rent payment for a one-bedroom apartment: $1,670

  • Renters insurance premium: $15

  • Car payment and insurance: $570

  • Groceries: $356

  Total: $2,611

  In this example, 52% of take-home pay is spent on mandatory expenses. This exceeds the 50% goal, but only by a small amount.

​Crunching the Numbers

• Next, savings and debt repayments need to be accounted for. In our example, these include:

  • Student loan payment: $393

  • Credit card or other debt payment: $300

  • Savings: $200

  Total: $893

  This fits into the 20% goal ($1,000). However, some people with substantial debt may exceed the 20% goal. Others may want to allocate more toward their debt to pay it down faster.

​Crunching the Numbers

• Finally, “wants” can include:

  • Cell phone bill: $100

  • Streaming services (Disney+, Netflix, Spotify, etc.): $31

  • Internet services: $70

  • Dining out: $400

  • Shopping: $250

  Total: $851

  This fits well into the 30% goal ($1,500).

​Crunching the Numbers

Multiple Choice

What percentage of income should be allocated to wants according to the 50-30-20 rule?

• 50%

• 60%

• 30%

• 20%

Multiple Choice

What should individuals do if their current spending exceeds the recommended percentages in the 50-30-20 rule?

• Increase their income

• Save more than 20% of their income

• Make changes to their lifestyles choices

• Ignore the rule and continue spending

Multiple Choice

Which of the following is NOT considered a necessity according to the 50-30-20 rule?

• Housing costs

• Groceries

• Vacations

• Healthcare expenses

Multiple Choice

What percentage of income should be allocated to necessities according to the 50-30-20 rule?

• 60%

• 30%

• 20%

• 50%

Multiple Choice

What is the purpose of the 50-30-20 rule for savings?

• To encourage excessive spending on wants

• To help individuals achieve long-term financial stability

• to limit savings to only 20% of income

• to discourage budgeting and financial planning

Multiple Choice

What is the 50-30-20 rule for savings?

• a rule that designates 3 categories for allocating income

• a rule that recommends saving 50% of income

• a rule that suggests spending 30% of income on necessities

• a rule that requires saving 20% of income

Multiple Choice

Which strategy will help you save the most money?

• Wait until the end of the month and add any money that you have not spent to your savings account.

• On the last day of each month, deposit a fixed $10 to your savings account.

• As soon as you receive your paycheck, put a fixed amount or percentage of your money directly into your savings.

• Wait to deposit into your savings account only when you have a large lump sum of money.

Multiple Choice

What is the benefit of automating your savings account contributions?

• You can change the amount you deposit each month.

• The fees are relatively small to enroll in this service.

• Your money will be transferred automatically and guarantees you will be contributing to your savings.

• Your employer will contribute additional money to your savings account if you enroll in this service.

Multiple Choice

What does it mean to "pay yourself first"?

• Deposit money into your savings account before spending on anything else.

• Purchase an item you want before something you need.

• Pay all of your mandatory expenses before paying for optional expenses.

• Obtain an additional job to supplement your income.

Multiple Choice

Which age group had the lowest savings rate in 2014?

• Under 35

• 35 to 44

• 45 to 54

Multiple Choice

What has been the recent trend with student debt for those under the age of 35?

• stayed the same over the years

• significantly increased over the years

• significantly decreased over the years

Multiple Choice

What typically happens to savings rates during recessions?

• Saving rates increase

• Saving rates decrease

• Saving rates stay the same

Multiple Choice

What is the relationship between age and savings rates?

• younger adults save less than other ages

• younger adults save more than other ages

• Younger adults save the same amount as other ages

Open Ended

We know that the longer a person saves, the more time their savings have to compound and grow. Given that fact, why do you think the young save the least and the older generations save the most?