Honestly, when it comes to budgeting, there are no hard and fast rules. Everyone is free to develop a system that works for them. Some people run a tight ship, some get by with no budget at all (and still don’t overspend). Others use budgeting apps or replace a strict budget with mindful spending.

If you like a framework, however, you might want to consider some tried and tested methods, like the 50/30/20 way of budgeting. But what is the 50/30/20 rule? Is it really a rule or just a guideline? And will it work for you, given your circumstances and money personality?

The first advantage of the 50/30/20 rule is its simplicity. You simply divide your after tax income into three categories: 50% for needs, 30% for wants and 20% for savings (or for paying off debt, if you’re carrying it).

Many of you will have already spotted the problem with this rule, for many people. In this day and age, too many of us need more than 50% of our income for necessities. If that’s the case for you, you can, if you choose, look on the 50/30/20 rule as a goal. You’re aiming to increase your income/streamline your needs until you get to the point where you could survive on 50% of what you earn.

Of course, ‘streamlining your needs’ is easier said than done, but one thing to remember when setting personal finance goals is that needs do change over time. The most expensive life phase for many people is when you have dependent kids to support, but that doesn’t go on forever. Your household needs decrease as your kids become financially independent, and this sometimes coincides with you being able to make career changes or expand your income streams.

The 50/30/20 budget rule is frequently discussed by personal finance writers and podcasters, but it is most commonly associated with the book, All Your Worth: The Ultimate Lifetime Money Plan by Elizabeth Warren and Amelia Warren Tyagi. It’s explained in more detail in the book, obviously, but you really don’t need to read a whole book to apply (or adapt) the rule to your own life and money management.

How does the 50/30/20 budget rule work?

It really is a case of simply assigning 50% of your income to needs, 30% to wants (this is what finance writers generally refer to as your disposable income, or discretionary spending) and 20% to saving or debt repayment as needed. Obviously, this is a little too simple in some ways. You’ll need to look at sub-categories within these categories.

Within needs, you’ll include:

• Rent or mortgage payments
• Groceries
• Utilities
• Insurance
• Essential transportation
• Clothes you actually need (such as those for children who have grown out of their current clothes)
• New consumer goods if something essential breaks and needs replacing
• Minimum payments on loans and credit cards

Within wants, you’ll include:

• Entertainment
• Eating out
• Travel for pleasure
• Transportation to do non-essential activities
• Beauty treatments and non-essential personal care
• Most new clothing purchases
• New electronics and consumer goods for the sake of upgrading

Note the subtle differences. Some people have problems distinguishing between wants and needs, and it’s fairly easy to see why. Clothes for children whose old clothes no longer fit them are needs. A new dress for someone who already has dresses in their closet is a want. A new refrigerator when the old one breaks is a need; an upgrade to a fancy new appliance when the old one still works is a want.

The last category is repaying debt, if you have it, or saving if you don’t, or maybe a combination of both (if for example you’re trying to build up an emergency fund while also paying off low-priority debt). Again there is a little crossover here. Minimum payments on loans and credit cards can be seen as needs, but any extra discretionary payments towards outstanding debts goes into the third category.

When does the 50/30/20 budget rule not work?

As we’ve already discussed, the 50/30/20 budget rule won’t work for those on a low income who simply need to spend most of their paycheck on essentials. Nor will it work for those with so much debt that they need to be putting every spare cent to paying it off, therefore needing to eliminate spending on wants, at least for now.

It also won’t make sense for some people, given their values and what makes them happy in life. There are people with very few wants who wouldn’t feel remotely comfortable spending 30% of their take home income on them, and those who genuinely feel that fulfilling their wants is what makes life worth living for them. And if you’re a high income, ‘low want’ individual you may find that your savings and debt repayment category is the biggest one in your budget. In that case, you’re likely to clear any debt quickly and start building significant savings.

Depending on your money personality, you may also find it hard, or guilt-inducing, to include so much of your pay in your wants category. That’s fine, too. Just remember that including fun money in your budget, which is basically what your wants category is, can have some pretty significant advantages.

For many middle income households, however, the 50/30/20 rule, or some slightly adapted, close approximation to it, might work as a simple and straightforward way to look at budgeting. As a side effect, it might help you work out exactly what your wants and needs are as well.

What to Read Next:

• How Much Does a Financial Advisor Cost?
• What is a Certified Financial Planner?

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Karen Banes is a freelance writer specializing in entrepreneurship, parenting and lifestyle. She writes articles, website content, ebooks and the occasional award winning short story. Her work has appeared in a range of publications both online and off, including The Washington Post, Life Info Magazine, Transitions Abroad, Brave New Traveler, Natural Parenting Group, and Copia Magazine. Learn More About Karen