How it works
The 50/30/20 rule, popularized by Senator Elizabeth Warren and Amelia Warren Tyagi, splits after-tax income into three buckets: 50% for needs, 30% for wants, and 20% for savings and extra debt payments.
Needs are things you must pay: housing, utilities, groceries, insurance, transportation to work and minimum debt payments. Wants are optional: dining out, entertainment, travel, upgrades. Savings includes retirement contributions beyond payroll, emergency fund deposits and paying debt faster than the minimum.
In high-cost areas needs often exceed 50%. Adjust the percentages to fit, but try to protect the savings share.
Formula
Needs = 50% × take-home; wants = 30% × take-home; savings = 20% × take-home
Questions people ask
Should I use gross or net income?
Use take-home pay after taxes. If retirement contributions come out of your paycheck, you can add them back and count them toward the 20% savings share.
Are minimum debt payments needs or savings?
Minimum payments are needs. Anything you pay above the minimum counts toward the savings and debt payoff bucket.
What if my needs are more than 50%?
That is common with high housing costs. Trim wants first to keep savings on track, and look for ways to lower big fixed costs over time.