What is the 50-20-30 rule? The budget rule to save regardless your salary

Needs, wants, savings, otherwise known as the 50-30-20 rule, is a way of budgeting your income that can help you get control of your finances.

According to the Bureau of Labor Statistics, the median weekly income for workers in the US from January to March 2023 was $1,100 a week. The median refers to the midpoint, meaning that fifty percent of workers make more than this amount, with the other half making less. If we apply the 50-30-20 rule to this income, a worker would spend $550 on their needs (i.e., housing, utilities, food, transport, childcare, etc.), $330 on their wants (i.e., non-essential purchases), and the remaining $220 would be put into savings.

The reality is that for someone to follow this budget advice, they need to earn enough to allocate only half of their income towards essentials. Critically, the median income varies widely when one accounts for gender, race, educational attainment, and age. While the median weekly earnings for a college graduate stood at 1,467 in early 2023, the figure for a worker with a high school diploma was $889.

Saving is not as simple as the rule suggests

Assuming that throughout the fifty-two weeks of the year, a person making $1,100 could put twenty percent of their income towards savings, they would accumulate $11,440. That hefty some would be a significant cushion in the case of an unexpected emergency expense. However, a recent report from the Federal Reserve shows that nearly a third of households do not have the savings necessary to cover a $500 emergency expense. Highlighting the vast economic inequalities that exist in the country, forty-six percent of those surveyed said that they would be able to cover an emergency expense valued at $2,000 or greater.

The US Bureau of Economic Analysis reported that in August, the average personal savings rate, as a portion of disposable income, was 3.9 percent —one of the lowest levels recorded over the last decade. Assuming a worker could only save that small part of their income, the annual total would fall to $2,251.

The high costs of housing for renters

The Fed also reported that over the last year, renters have seen their housing costs increase at much higher rates than homeowners. Renters spend around a third of their income on housing, while the national average for homeowners is around seventeen percent. If thirty-two percent of one’s income goes towards rent, that only leaves eighteen percent of all other essential costs if a worker is looking to abide by the 50-30-20 rule.

Renters are much more vulnerable to fluctuations in the housing market. Landlords who see the value of their property increase, often choose to increase the price offered for renting their unit. “Sixty-four percent of renters said their rent had increased over the prior 12 months,” writes the Fed, compared to only twenty-two percent of homeowners. Having little control over the costs of housing makes sticking to one’s budget much more challenging.