Budget Percentages: The Exact Split That Financial Planners Recommend
There are seemingly countless budgeting rules out there.
You’ve got the 70/20/10 rule, which splits your take-home pay into three categories: living expenses, savings and investments, and debt payments or charitable giving. Then there’s the 80/20 rule, which allocates 80% of your income to needs and wants, with the remaining 20% going toward savings, investments and debt payments.
Read More: 5 Hard Budgeting Lessons To Help You Break the Debt Cycle
Discover Next: 8 Low-Effort Ways to Make Passive Income (You Can Start This Week)
But have you ever wondered which budgeting method financial experts actually recommend — and why? If so, you’re in the right place.
The Budgeting Rule Financial Experts Recommend
The budgeting framework many financial experts recommend is the 50/30/20 rule. “The budgeting method I am a fan of is the 50/30/20 split,” said Cody Schuiteboer, president and CEO of Best Interest Financial. “I tend to recommend this method to the majority of young people that I work with that request help managing their finances.”
The 50/30/20 rule was popularized by Elizabeth Warren, a Massachusetts senator and co-author of “All Your Worth: The Ultimate Lifetime Money Plan." Under this approach, you divide your after-tax income into three categories:
50% for needs: Essential expenses such as housing, utilities, insurance premiums and groceries.
30% for wants: Nonessential spending that improves your quality of life, such as gym memberships, streaming subscriptions and entertainment.
20% for savings and debt repayment: While minimum debt payments generally fall under “needs,” this category is intended for accelerated debt repayment, savings and investing. If you have little debt and a solid emergency fund, you can direct more of this money toward retirement accounts and other investments.
You don’t have to follow the percentages perfectly. If your needs consume 60% of your income, for example, you may simply need to scale back spending in the other categories. The goal is to make the framework work for your situation and adjust as your finances improve.
Why This Budgeting Rule?
The purpose of any budgeting strategy is to help you stay in control of your money and build financial security over time. The 50/30/20 rule is no different. According to Schuiteboer, one reason it works is its simplicity.
“This method is less restrictive than other budgeting methods such as the 70/10/10 split and, in my opinion, it is sufficient,” he said. “Budgeting methods do not help if they are not used, and the more complicated the budgeting method, the more likely a person is to abandon it.”
What the 50/30/20 Rule Looks Like in Practice
According to the U.S. Census Bureau, the median household income is $83,730. Assuming you live in a state with no income tax and pay only federal taxes, your take-home pay would be about $67,455 annually, or roughly $5,621 per month.
Using the 50/30/20 rule, your monthly budget would look something like this:
$2,811 for needs (rent, groceries, utilities and other essentials)
$1,686 for wants (entertainment, dining out and discretionary spending)
$1,124 for savings, investments and debt repayment
In an ideal scenario, that final category can have a significant impact on your financial health over time. Saving $1,124 each month would add up to $13,488 after one year, not including any interest earned.
And if you’re carrying debt, that money can help you eliminate it quickly. For example, Gen Z consumers carry an average credit card balance of $3,493. At $1,124 per month, that debt could theoretically be paid off in a little more than three months.
Of course, not everyone can follow the 50/30/20 rule exactly. The key is to apply it as closely as possible and adjust as your income, expenses and goals change. As your earnings increase, consider directing a larger share toward savings and investments to build long-term financial security.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
More From MoneyLion: