Being able to responsibly budget finances is a skill that requires some self-discipline and planning. Before a budget can be created, it's important to determine which expenses are necessary to cover basic living needs and which expenses can be cut and put into savings. A good foundation to use to start budgeting wisely is the 50/20/30 guideline, which uses percentages of take-home income to help allocate funds appropriately.

The Rule

The 50/20/30 rule is a budgeting guideline that suggests splitting finances into three simple categories. The formula uses the amount of money an individual takes home, and does not take into account income that is being contributed to investments, such as a 401k or IRA, prior to taxes. The rule suggests budgeting income into these three categories:

  1. 1. Necessary Expenses (50%)

    The largest part of a budget using the 50/20/30 rule is reserved for the essential fixed costs an individual is responsible for on a consistent basis. This includes housing expenses such as rent or mortgage, utilities such as gas and electric, car payments, and other fixed costs. Home and rental insurance, health insurance, and car insurance also fall into this category. Using this rule, these necessary expenses should account for no more than 50 percent of an individual's take-home income.

  2. 2. Financial Goals (20%)

    The next 20 percent of a budget using the 50/20/30 rule should be allocated towards future financial goals. Expenses that fall into this category include credit card payments, additional contributions to retirement, or contributions to a savings account to build an emergency fund for unexpected costs. This portion of the budget can often be the hardest to advocate for, as its payoffs are not immediate. However, contributions to this category benefit financial stability in the long run.

  3. 3. Lifestyle (30%)

    The last category in this budget model is reserved for lifestyle expenses. These include personal expenditures and voluntary expenses that may or may not fluctuate from time to time. This category allows for the most flexibility on a monthly basis. Expenses could include things like a gym membership, going out to lunch, getting coffee in the morning, going to the movies, or paying for cable television services. This is the area of the budget that allows for everyday enjoyment and activities. To align with the budget, these expenses should not exceed 30% of one's take-home pay.

    The 50/20/30 rule makes a great foundation for successful budgeting. All budgets may not always fit perfectly into a mold, but setting baselines provides a framework for growth. The first step towards responsible budgeting is recognizing how much money is coming in and where it is being spent. Once those details are ironed out, categorizing expenses into a 50/20/30 budget can pave the way to financial prosperity.


The content on this site is for informational purposes only and is not professional financial advice. MaxLend does not assume responsibility for advice given. All advice should be weighed against your own abilities and circumstances and applied accordingly. It is up to the reader to determine if advice is safe and suitable for their own situation.

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