What Is The 50/40/10 Rule Budget? (With Examples)

The 50/40/10 rule budget can be life-changing for some. I first discovered it after reading an interview with an English woman who used the method to save up and purchase a house in Kent.

Of course, I had to try it. The first thing I did the next month was to implement it and see if it worked or not.

This budget may not work for everyone. Consider that 67% of Americans were living paycheck to paycheck in January 2022, according to the LendingClub Bank. This would be tough to do if you are in that situation. However, this is an excellent way to save money if you want to purchase something expensive like a house, car, or costly holidays.

Before you start on the 50/40/10 budget, let's explore what it consists of, if you should try it, and see examples to understand it better. You can also check the 60/40 rule budget, which is similar but with more categories, or try a different budget method.

What Is The 50/40/10 Rule Budget?

Like any budget method, the 50/40/10 is based on percentages and focuses on three different categories:

50 40 10 rule budget
  • Needs – You will spend 50% on your basic needs like bills, groceries, rent, and transportation.
  • Savings – You will save 40% of your salary to build your savings, pay off debt or invest the money.
  • Wants – You will spend 10% of your budget to pay for things you want that are considered non-essential expenses, like Netflix or gym membership.

So, you will have 50% of your salary to spend on basic needs, which can be challenging if you don't earn a lot of money. You will save 40% for a financial goal you have in mind, pay a debt or invest in something. Finally, 10% of your income will go to fun stuff you want to do, but that isn't necessary to survive.

Who Is The 50/40/10 Rule Budget Ideal For?

If you are living paycheck-to-paycheck, you definitely won't be able to save 40% of your income. You may start with small percentages of saving and increase them every month. Or you can try different budgeting methods like the 50/30/20 rule budget or the 70/20/10 rule budget.

This budgeting method is excellent for experienced people who can give up a lot of their earnings to save them and invest in other financial areas.

The 50/40/10 rule budget is excellent if you:

  • Have financial goals that need a large amount of money to be achievable, like paying debt or purchasing a house.
  • Want to save most of your salary to invest in something else.
  • Want to create an emergency fund to ensure you can live months without income.
  • Desire to achieve FIRE – Financial Independence Retire Early.
  • Don't live paycheck-to-paycheck and can pay for basic needs with half of your salary.

How To Budget Your Money With The 50/40/10 Rule Budget?

Now that you have an idea of what the 50/40/10 budgeting method consists of and if it’s perfect for you or not, let me clarify more in-depth all three categories.

50 40 10 budgeting

Spend 50% Of Your Money On Needs

The most significant piece of your earnings, 50%, will be allocated to the needs category, which encapsulates all the costs you can’t avoid or would be difficult to live without. Again, it’s crucial to be accurate because you can live without an entertainment subscription (that’s on the wants category), but not without paying the water bill. So concentrate on the basic needs in this section of your budget.

A few examples of what is considered to be part of the needs category:

  • Rent/Mortgage
  • Utility Bills (Water, Gas, Electricity)
  • Groceries
  • Transportation
  • Insurances
  • Any Loans
  • Medications
  • Household Products

If your salary is $2,000 after-tax, that means you would allocate $1,000 to your needs each month. In 12 months, you would have spent $12,000.

Spend 40% Of Your Money On Savings

40% of your income will be allocated to the savings category. Saving 40% every month is a fantastic way to achieve your financial goals, like paying some debt, saving money for a particular cause, or investing in something.

A few examples of what is considered to be part of the savings category:

  • Buying a House
  • Emergency Fund
  • Debt Payments
  • Real Estate Investments
  • Starting a Business
  • College Savings For Kids
  • Retirement Contributions
  • Stock Investments
  • Sinking Funds

If your salary is $2,000 after-tax, that means you would allocate $800 to savings each month. In 12 months, you would have saved $9,600.

It’s up to you what you want to do with your savings. The first step when it comes to saving money should be to create an emergency fund that allows you to pay all your essential bills like rent, electricity, car, and debt for at least six months in case you stop receiving income.

The second step would be to pay any debt (small amounts, so anything, till $5,000). Then you can start saving money for something you want to do, like buying a house or starting a new business.

Also, when I speak about debt, I am not considering the minimum repayments (those are in the needs category) that you must do monthly. Instead, this money is any additional repayments to consolidate your existing debt and future interest. For example, imagine a $5,000 loan that you need to pay in one year. If you repay a bit more every month, you will pay it faster and less, saving money on interest.

Spend 10% Of Your Money On Wants

10% of your income will be allocated to the wants category, which it's everything that is not essential, but you have joy consuming.

A few examples of what is supposed to be part of the wants category:

  • Holidays
  • Entertainment Subscriptions
  • Travel
  • Shopping
  • Dates
  • Dining Out
  • Memberships (gyms, professional organizations)
  • Hobbies

If your salary is $2,000 after-tax, that means you would allocate $200 to your wants each month. In 12 months, you would have spent $2,400.

You don't have a lot to spend on your wants, but the 10% you spend in this category is essential for you to live a little bit because life is meant to be lived (you need to control your money better).

How Do You Set Up The 50/40/10 Rule Budget?

If you decide you want to move forward with a 50/40/10 rule budget, here’s how you can set one up.

How Do You Set Up The 50 40 10 Rule Budget

1 – Calculate Your After-tax Income

So, the first thing you want is to calculate your after-tax income and understand how much money you will receive every month. Some people receive the same amount every month, but for others, it can vary, which makes budgeting a lot more complicated (but not impossible). If you are a freelancer, estimate how much money you expect for the next month. Some people get paid weekly and some biweekly, so you must adjust your budget according to your situation.

You can use the free tool on the IRS website to help you determine how much income you can expect to receive and how much taxes you will pay. However, if you have any questions, it would be better to speak with a tax professional.

2 – Use The 50/40/10 Template/Spreadsheet

To keep you organized and have a more reasonable perspective of what you need to do, ensure you use the 50/40/10 template. It can be a spreadsheet that you print and use/fill online or an Excel sheet. Whatever makes your life easier, it’s what you should use. Don't forget your partner's income and expenses, and check the best personal budget categories for you.

I love Excel sheets, but some people like to have a printed spreadsheet where you can quickly look at all your expenses and how much cash you have allocated to each category. Learn how to make a budget in Excel.

3 – Categorize Your Spending From Last Month

Now you need to split all your income between the three categories of needs, savings, and wants. Again, try to be the most specific possible to have a clearer idea of your expenses. Check your bank statement from the last month, and you will be fine.

Start with your fixed expenses (50% of the budget), like rent, bills, insurance, etc. Then go for the things you want to buy (40% of your budget). Of course, don't forget the fun part and add your wants (10% of the budget).

You should also know how much money you allocate to each category from your income. Again, you can find out by doing these maths (you can check the examples section to understand better how to do it).

50%= Income x 0.50 = amount for your needs
40%= Income x 0.40 = amount you will save
10%= Income x 0.10 = amount for your wants

4 – Set Up Your Financial Goals

Once you determine how much income you will receive, how much it’s allocated in each category, and all your expenses are organized, you need to set financial goals.

In my opinion, no budgeting is worth it if you don’t have the motivation to keep going with it. You need to set some financial goals for each month or even for an entire year or five years. I gave you some ideas above of what your objectives could be. Some examples are buying a house, paying an immense debt, or creating an emergency fund. You also need to know why you want to invest your money.

You didn’t set your financial goals at the beginning because you didn’t know your income and expenses. Now you can set realistic financial goals because you know your monetary situation.

5 – Evaluate And Adjust Your Spending

Finally, you must evaluate and adjust your budgeting at two different moments. First, you will check your spreadsheet and see if you need to make any adjustments to ensure you respect the percentages of each category and don’t overspend. The second time you need to evaluate it’s at the end of each month and see what went right and wrong and make more adjustments.

Every month you will need to evaluate and adjust your personal budget or family budgetDon’t get discouraged if you fail or if it doesn’t go like you wanted because you will not get everything perfect on the first attempt. Even the more experienced budgeters like me still make mistakes after years of budgeting.

50/40/10 Rule Budget Examples

The average American earns approximately $51,480 gross per year in the USA, equivalent to $4,290 gross per month. So that’s the value I will use in my example.

Note: For your information, I have researched a lot about how much the average American pays for rent, bills, groceries, etc. However, it would help if you kept in mind that it varies significantly in each state. These examples are only for you to understand better how the 50/40/10 rule budget works.

The first example is for a single person who splits a house with someone that is not their partner and has no kids.

50 40 10 Rule Budget Example

As you can see in the example, all the money is allocated according to the 50/40/10 percentages for each category. In each category, you can be as specific as you want. For example, I have assigned $300 to Investments, but you can specify how much money each investment you make will get. This will help you to control your money better.

When it comes to your supermarket shopping, you don't need to be that specific (unless that helps you). You can split the $230 between four weeks and have Groceries Week 1 ($57.40) and Groceries Week 2 ($57.50). Remember that what you write in the budget is to assist you. Put on your budget whatever you think will help you the most.

50 40 10 rule budget example 2

If you're budgeting your money and your partner's salary as well, you can check the 50/40/10 rule budget example for two incomes. Remember that you merge the two salaries into one and use that amount to budget your money for the month.

It can be a massive challenge to budget money with someone else when you have kids because that means having the entire family on the same financial page, which sometimes doesn't happen. For example, you may think that $100 every month is enough for the holiday account, but your partner may think you should save $200. It's always good to share your opinions and arrive at a consensus.

Is The 50/40/10 Rule Budget Good For You?

If you need a budget where half of your income will take care of your needs and most of the other half goes to your savings and investments, the 50/40/10 rule budget is perfect for you.

You can always try to cut some of your expenses (you will definitely need to cut in the wants category), and you may need to lower some of your essential bills to ensure you don't spend more than you should.

Whatever your mindset, until you try the 50/40/10 rule budget, you will never know if it works. So why not start it right now?

Michael launched Wealth of Geeks to make personal finance fun. He has worked in personal finance for over 20 years, helping families reduce taxes, increase their income, and save for retirement. Michael is passionate about personal finance, side hustles, and all things geeky.