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What Is the 50/30/20 Budget Rule and Does It Still Apply Today?

Today’s living costs have taken a toll on the 50/30/20 budget’s viability.

Justin Cupler

Contributing Writer at Tally

May 13, 2021

There are no shortage of budgeting methods, from the envelope budget to the zero-based budget and everything in between. The 50/30/20 budget rule, also called the rule of thumb budget, is one of the simpler budgeting methods. It simplifies financial tracking so even busy people can monitor where their money is going. 

Coined by Senator Elizabeth Warren and her daughter Amelia Warren Tyagi, the 50/30/20 budget is helpful in some cases. But with today's living expenses shooting upward, especially real estate, is it still a viable option? 

We’ll explore the 50/30/20 budget rule's usefulness today and how you can tweak it to fit your situation.  

What's the 50/30/20 Budget Rule? 

The 50/30/20 budget rule is a budgeting method for folks who don't have the time to or prefer a simple way to budget every expense. They'd prefer to place all their expenses in one of three buckets: needs, wants, and savings/debt. 

How it works is you budget 50% of your monthly take-home pay — the after-tax income — to cover your needs, 30% to cover your wants and 20% to cover debt repayment or to tuck away in a savings account. From there, you'll make mild tweaks to your monthly expenses until you meet the percentage thresholds. 

The 50/30/20 budget is great for giving you a high-level view of spending habits, overall progress toward meeting financial goals and discretionary spending — spending money on items that are not necessary to live.

Determining what bucket expenses fall into

Some subjectivity comes into play with the 50/30/20 budgeting rule, and it mostly has to do with what bucket each monthly payment falls into. For some, a cellphone plan may be a want, but someone who uses their smartphone for business may place it in the "needs'' category in their monthly budget. 

Someone who works remotely may consider automobile fuel a non-essential want, whereas someone who commutes every day needs that fuel to get to work.

However, some expenses are objective needs and wants. Here are some examples of common expenses that fall into each of the three categories.

Common needs: 

  • Rent or mortgage payments.

  • Electricity.

  • Water.

  • Heat.

  • Food.

  • Clothing (within reason).

  • Health care.

  • Health insurance.

  • Student loan payment.

  • Child care.

  • Minimum debt payments (e.g., monthly car payment, minimum credit card payments).

Common wants:

  • Cable television.

  • Netflix or other streaming subscriptions.

  • Premium clothing.

  • Eating out at restaurants.

  • Coffee from a cafe.

  • Gym memberships.

Common savings/debt items:

  • Down payment

  • Retirement contributions (401(k) or IRA).

  • Emergency fund.

  • Extra payments on debts.

Is the 50/30/20 Budgeting Rule Still Useful Today?

Recently, the cost of living has steadily increased faster than wages, leaving us with a smaller gap between the money we need to survive and our monthly income. Particularly alarming in the cost department is real estate. 

In January 2021, home prices skyrocketed by 11.2% — 7.3 percentage points more than the home price increased in January 2020. And this jump wasn't an anomaly; it was months in the making. Home prices rose 4.8% in July 2020, 5.8% in August 2020, 7% in September 2020, 8.4% in October 2020, 9.5% in November 2020, and 10.4% in December 2020. 

Seeing home price increases rising throughout a year is nothing alarming, but these increases are generally fractions of a percent, not whole percentage points. 

Today, the average new-home sales price is $408,800, according to Statista. With closing costs running 2-5% of the loan amount and an average down payment of 6%, the average mortgage balance is between $391,957 and $403,485. 

On the low end of that range, your 30-year mortgage payment at the average mortgage interest rate of 3.21% would be $2,021 per month, including taxes and insurance, according to Bankrate's estimator.

Looking at the other side of the equation, the average American earns $51,168 per year. So, a married couple would earn, on average, $102,336. And in 2020, the average worker was taxed at 22.4% when you figure in state and federal taxes. So this couple's monthly take-home pay would be about $6,617.23. 

That $2,021-per-month mortgage payment would eat up 30.5% of the average take-home pay, leaving less than 20% to cover other needs. 

Can you cover living expenses with less than 20% of your take-home pay?

The average mortgage payment leaves just under 20% of your take-home pay to cover other necessary expenses in the 50/30/20 budget. Is it possible to cover other basic needs with the remaining income? Let's see some national averages to find out. 

  • Car Payments: The average car payment on a used car in the U.S. is $397 per month. If you and your spouse each had a car payment, this would total $794 per month. 

  • Utilities: The average American household spends $2,060 per year on utilities, including water, heating and cooling, electric and gas, trash, landline phone and internet. This comes out to $171.66 per month. 

  • Groceries: The average American household spends $3,935 per year on groceries, which comes out to $327.91 per month. 

  • Clothing: The average family spends $1,800 per year on clothing, which is $150 per month. 

  • Health care and health insurance: On average, an American spends $11,582 per year on health care expenses. For two people, this would come out to about $1,930 per month. 

  • Student loan payments: Student loan payments, on average, take up $222 per month. Assuming you and your spouse each have payments, this would total $444 per month. 

  • Minimum credit card payment: The average U.S. household has $7,149 in credit card debt. Assuming a flat minimum payment of 2% of your balance, this would be $142.98 per month. 

Now, total up all the needs listed here and you have $3,960.55. Add in the $2,021 mortgage payment and you have $5,981.55 per month just to cover your basic needs. That's 90.3% of the average take-home income from above ($6,617.23) and that's not including a large variable, which is child care.  

So, for the average American, the 50/30/20 rule may not work out. 

Who Does the 50/30/20 Rule Work For?

Just because the average American would find it hard to cover their expenses using the 50/30/20 rule doesn't mean it's not worthwhile. There are plenty of people who may find it perfect. For example, if your employer covers most or all of your health insurance premiums and its coverage keeps your out-of-pocket costs small, 50% of your take-home pay may be plenty to cover your other needs. 

Other examples include families with just one vehicle or multiple paid-off vehicles, those who buy a home that's well below their means or folks who have lower-than-average personal expenses.  

How to Determine If the 50/30/20 Budget Will Work for You

The best way to know if the 50/30/20 budget will work for you is to add up your expenses in each category and crunch the numbers. If you find this budgeting method isn't right for you, there are many other budgeting methods to consider.

Whichever budget you choose, you may find that you need to trim your monthly expenses.

If your trouble area is credit card payments, the Tally line of credit1 can help with its access to lower-interest credit you can use to pay off credit cards. This can help lower your monthly payments. Plus, Tally will manage all your credit card payments for you and create customized payoff plans. 

50/30/20 Rule Isn't for Everyone, but It's Still Viable

The 50/30/20 budgeting rule is all about simplification. It's for people who want a monthly budget but don't have the time to track every transaction. Instead, it provides a high-level view that allows a glimpse at your overall financial health and spending trends.

Like many budgeting methods, the 50/30/20 rule isn't for everyone. Some people have more aggressive savings goals that well exceed the 20% savings allowance. Other folks are like the average American and simply can’t cover their living costs with just 50% of their take-home income. 

That said, some people are in the perfect situation to run with the 50/30/20 budget, including those with fewer expenses and those with generous employers that cover 100% of the medical insurance. 

Remember, Tally can help you get your expenses in check with its line of credit. With this credit line, you can pay off your high interest credit cards, lower your interest rate and streamline the repayment process. 

1To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) Will be between 7.9% - 25.9% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate.