Americans have been struggling to save since before they were Americans.
“If you would be wealthy, think of saving as well as of getting,” wrote Benjamin Franklin in “The Way to Wealth,” his widely popular 1758 essay.
“You may think, perhaps, that a little tea, or a little punch now and then, diet a little more costly, clothes a little finer and a little entertainment now and then, can be no great matter; but remember, many a little makes a mickle; and farther, beware of little expenses; a small leak will sink a great ship.”
So it is today.
Nearly four in 10 Americans would go into hock to cover an unexpected $400 expense, per the Fed, while credit card delinquency rates are at an almost 15-year high. Moreover, almost 40% of Americans are at risk of a lower standard of living when they retire.
One way to get a handle on your finances is to create a budget, and one of the most popular budgeting techniques is the 50/30/20 rule, popularized by Senator Elizabeth Warren.
Here’s how the rule works, as well as the advantages and disadvantages of this approach to personal finances.
The 50/30/20 Rule Explained
The numbers in the rule correspond to what percentage of your after-tax income should be apportioned to three broad categories. That is, 50% should go toward needs, 30% toward wants and 20%toward savings.
Needs (50%)
These are expenses required to keep your life afloat, such as:
- Groceries
- Home (rent or mortgage)
- Utilities
- Transportation
- Health care
- Minimum debt payments
Of course, everyone is different, so your necessities may also include child care or assistance for elderly parents.
Every family is also different, as Sylvia Porter notes in her personal finance tome, “Money Book.”
“You have a couple of elementary-school-age kids, you live in the suburbs and the family breadwinner commutes to work in his car,” she writes. “Are two cars a luxury or a necessity?”
The point is that these are the bills and commitments without which your life would be fundamentally different.
However, it’s important to remember that simply because something is a need doesn’t mean you can’t be sensitive to cost.
You need a place to live, for instance, but that doesn’t mean you should buy a house you can’t afford.
Wants (30%)
Then you have the things that make life a bit more fun. Wants include items like:
- Restaurants
- Vacations
- Gifts (to others or yourself)
- New clothes
- Streaming services
- New televisions or computers
Again, you should distinguish wants from needs when separating your spending.
Wants aren’t, by definition, frivolous. A family vacation, Christmas presents for your grandmother and new school clothes can all be valuable uses of your income.
But wants aren’t needs.
Should your income dry up, these are things you’d have to sacrifice or pare back to keep your finances in order.
Savings (20%)
The rest of your income, then, should be directed toward savings, which may include:
- An emergency fund
- Brokerage accounts
- Car payments
- Student loan payments
- Debt payments beyond minimums
This category is all about sacrificing spending in the present to benefit your future self.
This can often be the most challenging aspect of any budget.
The personal savings rate (your personal savings as a percentage of your disposable personal income) was 3.9% in May 2025, which is about one-third as much as it was 50 years earlier.
50/30/20 Rule Example
To get a sense of how the rule works, take the following example.
Let’s say that you take home $8,000 a month in after-tax income. Under the 50/30/20 rule, you’d put:
- $4,000 towards needs
- $2,400 towards wants
- $1,600 towards savings
Of course, how those funds would get divided from there depends on your particular circumstances.
50/30/20 Rule Pros
The chief benefit of the rule is its simplicity.
Rather than using a zero-based budget, where you assign a purpose to every dollar of income, the 50/30/20 rule allows you to fudge it.
You don’t need to keep track of every spending category, rather you must simply make sure you’re sticking to the broad outlines of the plan.
This is particularly useful for those who are scared off by the idea of money management and don’t want to dive into the deep end with a budgeting app that requires time and brainpower, such as You Need A Budget.
By keeping it simple, you may increase your belief in yourself to positively impact your financial situation (a concept known as financial self-efficacy). Since you’ve seen yourself succeed, this can lead you to have the confidence to tackle more difficult financial problems, such as planning for retirement.
The rule also reinforces solid money management basics.
It emphasizes savings, as well as paying down debt.
Take the example from above. If you were to put away $1,600 a month in a high-yield savings account, you’d have more than $19,000 saved in principal alone by the end of a year. That’s more than twice as much as the median American household.
50/30/20 Rule Cons
Still, the 50/30/20 rule has tradeoffs you should consider.
The biggest issue is that it’s not particularly realistic.
In 2023, The typical household earned roughly $88,000 after taxes, according to the Bureau of Labor Statistics.
According to the rule, that family should cap their needs spending at $3,667 a month.
In reality, though, the average household spent more than $4,200 per month between housing, groceries, health care and transportation. Toss in student loans or credit card debt, and it can be difficult to make the numbers meet.
Constantly overspending the threshold limits might also cause you to lose confidence in your financial self-efficacy, thereby creating a snowball effect where you believe you can’t control your money at all.
Another concern is the structure of the rule itself.
While the rule is easy to set up, it’s pretty rigid when you use it.
Rarely do people spend the same amount each month on the same categories. Maybe child care costs rise in the summer when you sign your kid up for summer camp, or you need to replace a broken refrigerator.
By sticking to a set limit, you’re less able to adjust to changing circumstances.
A zero-based budget, on the other hand, lets you adjust your category spending each month to reflect the reality of your situation.
Got a big trip coming? You can budget for it, while reducing your spending in other domains.
Should You Use the 50/30/20 Rule?
Consider the 50/30/20 rule if you’re new to budgeting and have low needs-based spending. For instance, a young worker living in an apartment with a stable job could benefit from the rule. The housing, health care, food and transportation costs, for instance, would likely be lower for the young, single worker than for a family of four.
More experienced budgeters—and those with a wider set of responsibilities—should instead consider using a budgeting app to map out how much they can spend on what in a given month, while also meeting their savings goals.
