A Simple Guide to Better Budgeting
First popularised by Elizabeth Warren in her 2006 book All Your Worth: The Ultimate Lifetime Money Plan.
The 50/30/20 rule offers a practical way to manage household finances. The method is straightforward: allocate your after-tax income into three categories—essentials, flexible spending, and financial goals.
With the 50/30/20 rule there's no need for people to create complicated budgets that are never met. If there's a balance between needs, wants and commitments, an applicant is on the right track for financial resilience.
How It Works
Essentials (Needs target: 50%)
This covers non-negotiable expenses required to live and work:
Rent and / or mortgage
Utilities and other bills
Housekeeping
Travel
Minimum debt payments
Key Insight: Spending more than 50% on essentials signals an imbalance, leaving less room for other priorities.
Flexible Spending (Wants target: 30%)
Discretionary expenses that enhance your lifestyle fall into this category:
Eating out
Entertainment
Holidays
Non-essential shopping
Gambling
Key Insight: These are non-essential but contribute to your quality of life. Overspending here can risk financial goals. Equally people need to enjoy their lives and too little spent here may also be a problem.
Financial Goals (Commitments target: 20%)
The final are of spending is directed toward building financial security:
Paying down debt (beyond minimums)
Emergency fund savings
Retirement contributions and other investments
Key Insight: These focus on preparing for the future and achieving financial freedom.
50/30/20 in the NestEgg Dashboard
To complement the 50/30/20 rule, the NestEgg Dashboard uses a RAG (Red-Amber-Green) system to assess spending in each category. It’s a diagnostic tool to identify imbalances and guide financial adjustments:
Needs
🟥 Red: Must have crash zone. Expenditure on needs exceeds 65%
🟧 Amber: Must have danger zone. Expenditure on needs is between 50 and 65%
🟩 Green: Must have balance. Expenditure on needs is below 50%
Wants
🟥 Red: Splurger. Expenditure on discretionary expenditure exceeds 30%
🟧 Amber: All work and no play. Expenditure on discretionary is less than 20%
🟩 Green: Wants in balance. Expenditure on discretionary expenditure is between 20 and 30%
Commitments
🟥 Red: Debt problems. Any item in the commitments donut is red; that means the presence of high cost creditors and / or debt collectors.
🟧 Amber: Caution. There's spend on other credit commitments.
🟩 Green: Saver. Expenditure on commitments is all focused on building savings.
Why It Works
For people
This method provides a structured yet flexible framework to manage money while meeting short- and long-term goals. It promotes mindfulness in spending, ensuring essentials are covered, lifestyle needs are met, and the future is secure.
For affordability assessments
The 50/30/20 rule is useful for lenders when assessing whether a loan is affordable for a borrower because it provides a clear and structured framework for understanding a borrower’s financial situation.
Evaluating Borrower’s Debt-to-Income Ratio
The 50/30/20 rule limits 50% of income to essential expenses (including minimum debt payments). This allows lenders to see whether the borrower has room to take on additional debt without overstretching their budget.
If a borrower’s needs already consume a high percentage of their income, lenders may consider the loan unaffordable.
Identifying Disposable Income
The 30% allocation to wants indicates how much discretionary income the borrower has available and shows if they may have room to redirect funds toward servicing the loan. Overspending in this category could signal poor financial management.
Ensuring Capacity for Financial Goals
The 20% savings and financial goals category shows how much the borrower is prioritising their financial resilience. If the borrower is actively saving or paying down debt, it demonstrates financial discipline and the ability to handle new commitments responsibly.
Borrowers with little or no allocation toward savings may pose a higher risk of default, as they have a limited financial buffer.
Helping to Predict Financial Strain
Lenders can use the rule to simulate scenarios: If the borrower takes on a loan, will their needs exceed 50%? Will the additional loan payment leave them with insufficient funds for discretionary spending or savings? These insights help gauge whether the loan could push the borrower into financial distress.
Aiding in Responsible Lending Decisions
By applying the 50/30/20 rule, lenders can make more informed decisions:
Approving loans for borrowers who have balanced budgets and enough room for new debt.
Declining loans for borrowers whose budgets are already stretched, reducing the risk of default and the associated negative consequences for the borrower.