The 50/30/20 financial planning rule – how it works.

Most people are aware of the importance of budgeting, but actually getting started with responsible money management is an entirely different story. It’s difficult to know how much you should be spending and saving each month in order to ensure financial prosperity down the line, and trying to figure out the right split for you and your family can feel like an overwhelming task.

That’s where the trusted 50/30/20 rule is helpful. Pioneered by American politician, academic and bankruptcy law specialist Elizabeth Warren and her daughter Amelia Warren Tyagi back in 2005, the model recommends that you organise your monthly budget into three categories to ensure that you don’t just cover your expenses, but also save for the future and still have some cash left over for the nice-to-haves. There’s a good chance you’ve already heard about this rule of thumb, but do you understand what it actually entails? Today’s post aims to unpack this guiding principle so you can draw on it to better manage your finances.


1. The 50% slice: your needs

The 50/30/20 rule stipulates that 50% of your after-tax income (not your gross income; remember to base calculations on what you’re taking home after tax deductions) should go to your essential needs and basic living expenses. This includes costs like rent, electricity, school fees, transport, prescription medications, and vehicle and medical insurance. It sounds fairly simple to work out, but truth is, the line between what constitutes a ‘need’ and what’s actually a ‘want’ can be a little blurry. For instance, you might think that ultra-high-speed Internet is a must-have, but if doing without it doesn’t severely impact your quality of life, then it should be considered a ‘want’. ‘Needs’ are only those expenses that you cannot forego without being greatly inconvenienced. If your essentials are taking up more than 50% of your after-tax income, you may need to reconsider your lifestyle somewhat – consider moving to an area with lower rent or carpool to work.

2. The 30% slice: your wants

Warren’s rule makes provisions for 30% of your take-home income to be allocated to those purchases that make life a little more enjoyable – movie tickets, dinner at an upmarket restaurant, a designer suit, and Netflix, for example. When setting aside money for this category, remember that you still need to be responsible – you might want regular overseas vacations, but that will leave very little room for other ‘wants’, like a gym membership, that will ultimately add more value to your life. It’s also worth noting that 30% is the upper limit for this class of costs – if you’re willing to allocate less than 30% to flexible spending, then you’ll have more to put towards the third category, your savings.

3. The 20% slice: savings and debt-reduction payments

Because long-term prosperity and financial stability should always be top of mind, the 50/30/20 rule recommends that 20% of your after-tax income should be dedicated to savings and wealth building activities. This includes your investments, retirement annuities, and emergency fund. It also includes extra payments towards your bond, vehicle financing, and credit card balance (beyond the minimum payments) in an attempt to reduce your debt faster. If you’re having difficulty reducing the amount you spend on needs and wants, consider making use of these helpful money saving tips for working professionals.


This wealth management model is effective because it makes taking control of your finances more manageable and less overwhelming. By simplifying budgeting and offering a clear plan of action, it helps you to stay consistent in your money management practices and protect your wealth for decades to come.

That said, like most rules of thumb, the 50/30/20 principle is meant to serve as a guideline only, and it won’t necessarily work perfectly for absolutely everyone. To develop a sound wealth management plan tailored your needs, it’s always best to consult an experienced professional. At TRG, our team of independent financial advisers are well equipped to structure a financial strategy for you, complete with custom-made investment and insurance solutions that are designed to help you achieve all your wealth objectives. 

Looking for an expert in private wealth management? We’d be happy to help.