The 50/30/20 Rule to Budgeting
The 50/30/20 rule of budgeting is a strategy that is widely used and recommended within budgeting and finance circles. The 50/30/20 rule was first popularized by Senator Elizabeth Warren in her book, “All Your Worth: The Ultimate Lifetime Money Plan.” It is only one of many strategies you can use to manage your finances but its simplicity makes it a great jumping off point for beginners. Consider this a good starting point to getting your finances in order before you dig in to a more detailed budgeting strategy. This budgeting strategy allocates 50% of your income to your needs, 30% to your wants, and 20% to your debts and savings.
50% – Your Needs
Using this strategy, you should begin with listing out all of your monthly necessities. Examples of needs would be your housing (mortgage or rent), utilities, car payment, car insurance, groceries, gas, phone bill, pet expenses, etc. These are things that you cannot live without. Your goal here should be to keep these bills and expenses below 50% of your monthly income. If you are starting at over 50% of your income going towards these expenses, your first order of business should be to see where you can cut to get to your 50% goal.
30% – Your Wants
Next, you should list out all of your monthly wants. Wants are any monthly bills or expenses that you’d like to keep that improve your quality of life but you don’t necessarily need to survive. Examples of wants would be a gym membership, subscriptions, your coffee budget, eating out, vacations, etc. Your goal here should be to keep these expenses to 30% of your monthly take home. Again, if you’re starting at over 30%, you’ll want to begin by seeing where you can cut to get to your 30% goal. This may be an easier place to see initial movement than your needs category.
20% – Savings and Debt
Although the smallest percentage of your budget, this one is still very important. The final 20% of your budget should be allocated toward paying off any debt you’ve accumulated and saving toward any savings goals that you have. If you’re interested in learning more about my recommended method to balancing saving and getting out of debt, click here to view Your Financial Roadmap: Save Money, Pay off Debt, & Retire Early.
The 50 / 30 / 20 Budget in Action
Now, let’s put our strategy into action with the help of my fictional friend, Charlotte. Charlotte has decided to adopt the 50/30/20 strategy and is beginning by listing out all of her bills and expenses into our three categories to see where she is beginning. Charlotte’s monthly income is $4,500 and her expenses are as follows:
Charlotte’s needs total 66% of her monthly income, her wants 29% and her savings and debt only 5%. Now that all of her expenses have been laid out, Charlotte can create a plan to bring her budget into balance with the 50/30/20 rule.
For Charlotte, this may be lowering her monthly rent by moving to a cheaper apartment or getting a roommate. Each individual’s journey with the 50/30/20 budget will be unique, but I hope this has helped highlight the process and given you the tools you need to go ahead and create your own.
