Don’t obsess over the 50/30/20 rule, advisor says: ‘Ratios can be helpful' but 'priorities change’

The strategy “may need to be flexible to adjust for reality.”


The 50/30/20 rule splits your paycheck into three main buckets: needs, wants, and savings. Sticking to this strategy could help you build a better budget and wisely allocate your cash. But since everyone's finances are different, you need to adjust the numbers to fit your needs.

"Ratios can be helpful rules of thumb," says Jorge Padilla, a certified financial planner and senior client advisor at Meira, "but life's priorities change, and these ratios may need to be flexible to adjust for reality."

While the rule could work for high-earners or those with a lot of money set aside, saving and investing 20% might be harder for people cash-strapped because of the pandemic, he adds: "Their essential needs may be more than 50%."

Here's a look at the 50/30/20 rule, and how you can make it work for you.

Half your income goes toward needs

Rule: The category involves spending no more than half of your income on essential costs and nonnegotiables, such as rent or mortgage, health care, food, and any regular monthly bill.

Even before the pandemic, more than 10 million American renters, or about 1 in 4, were putting more than half of the paychecks toward housing alone, not counting food or other necessities, according to a 2018 report from the Joint Center for Housing Studies of Harvard University. More recently, data shows even millennials homeowners are cost-burdened due to high prices.

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"When you are in high cost of living states such as Massachusetts, New York, and California, saving 20% may be difficult and you have to choose if you want the mansion now and to work longer later or live in a smaller home, reduce expenses, and have a chance to retire earlier," says Julian B. Morris, a certified financial planner at Concierge Wealth Management.

Tip: If your fixed costs eat up more than 50% of your income, try to negotiate cable and phone bills down (with help from pandemic relief programs) or cut money from the next two buckets in order to make up the difference. This may be a good time "to ask yourself if the current lifestyle is the right one to allow you to be in a solid financial position in the future," says Padilla.

20% of your income goes to saving, investing

Rule: This portion of your money is put toward savings like an emergency fund, workplace retirement accounts such as 401(k) or Roth IRAs, plus other investments like stocks and bonds.

Tip: Some experts advise you pay yourself first with an emergency fund. Many suggest storing at least 3 to 6 months' worth of living expenses, but aiming for small goals along the way can help. Next, take advantage of your employer's retirement savings plan if they offer it.

Ratios may need to be flexible to adjust for reality.
Jorge Padilla

"Contribute to the 401(k) up to the maximum matching amount, max out your Roth IRA contributions, and find an investment strategy that will help you set it in autopilot," Padilla says. If you can't do the max, investing "at least 10% of income is a good general baseline."

Anything left over in this category, you can put toward debt or "invest in yourself with increased education, certifications, courses, etc. that will help increase your earnings potential."

30% of your income goes toward wants

Rule: After paying for essentials and saving money for the future, it's important to treat yourself, experts say. The last chunk of your earnings can be spent on anything nonessential. That means streaming subscriptions, dining out, or even a luxury upgrade like a new car.

It makes sense to "spend some money on fun and experiences that bring us happiness," explains Padilla. Whether that is 30% or less will depend on each person, but "studies have shown that spending money on you [as well as] on others can have a tangible impact."

Tip: While the 30% is the "one where most people are going to find the most value," Kelley C. Long, a Certified Financial Planner and Certified Public Accountant at Financial Finesse, previously told Grow, be careful you don't exceed your limit and go into debt by planning ahead.

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The bottom line: Have a plan for your money that works for you

However you break down the numbers, having a plan for your money is helpful. Using the 50/30/20 rule may provide some structure and organization, even if you don't follow it exactly.

"A couple with two kids approaching college may want to prioritize savings toward education and reduce their discretionary lifestyle for a while, so their 30% may be lower on a temporary basis," says Padilla.

Digital nomads, meanwhile, "may enjoy a much lower than 50% lifestyle essentials budget while increasing their discretionary 'wants' expenses and/or savings."

The key is to be flexible: "It's like baby steps for budgeting if you're looking to get your expenses more in line with your goals," Long said. "It [gives] you great guidelines for how you should make spending decisions."

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