lasted updated August 3rd, 2021
The 50/20/30 budget rule was popularized by Senator Elizabeth Warren in her book “All Your Worth: The Ultimate Lifetime Money Plan” which states your after-tax income should be split 50% on needs, 20% on debt repayment & savings, and 30% on wants. This is simply a guideline on how to better manage your spending. We have created an easy to use calculator to help track your budget and stay within the 50/20/30 rule.
Needs are your essentials for getting by. They include your mortgage or rent payments, average monthly spend on utilities, home owners association fees, vehicle loans, auto insurance, life insurance, out of pocket medical insurance, cellphone, internet, fuel, and groceries. Needs also include minimum payments for your debts such as credit cards and personal loans. Needs are laid out as “if you lost your job yesterday, how much money would you need to get by for the next few months?”
Debt Repayment and Savings 20%
The 20% allocated to debt repayment and savings can help make your financial plan stronger. Ensure you are saving at least 10% of your take home pay towards your savings goal. The additional 10% is used as additional payments towards your debts using the debt snowball method.
Why is this part of your budget crucial? If the budget is the foundation to the financial plan, the debt repayment and emergency savings is the concrete. Having a systematic approach to repaying your debt and saving would ease the stress of your budget. Try automatic payments for your credit cards, half a payment on the 1st and half a payment on the 15th. This would make it seem as though you have made two payments but also made your plan more manageable. Try to same approach to building your savings account.
Wants are all the things that are non-essential. Dining out, beauty supplies, clothing, gym and club memberships, AAA, Netflix, Hulu, Amazon, Apple Music, Spotify, concerts, movies, sporting events, Uber and Lyft rides. Overspending here can be a major budget killer. You have to have some money set aside for luxuries otherwise what would be the point. However, you have to live within your means and spend within your budget.
What does this mean?
If you make $3000 a month after taxes, (50%) $1500 a month would go to your needs, (20%) $600 goes to your wants and (30%) $900 goes to your wants. This would be an ideal budget and create a healthy foundation for a financial plan.
What if I’m spending too much on my needs? This would mean you need to find a way to lower your essentials. Are you paying too much for rent when we could instead have a roommate to split some bills? Can you lower some utilities such as cellphone or internet? Are you spending too much on a vehicle? In what ways can your needs be lowered for you to free up some of your hard earned dollars?
What if I’m spending too much on my debt or I don’t have enough to save? You would have to first evaluate the spending on needs and wants to see where you can cut back.
“I’m spending too much on my wants”. This is too common of a scenario for most of my clients who were new to financial planning. You have to create a budget that allows for some fun money and still allow for good financial habits to be formed.