The 50-30-20 Rule and How You Can Use it to Guide Your Financial Planning

April 18, 2019

2 min read


KEY TAKEAWAYS

✔ Budgeting helps you financially plan

✔ One budgeting tool is called the 50-30-20

✔ To follow this rule, you spend 50% on needs, 30% on wants and 20% on savings


Have you ever heard of a budgeting term called the 50-30-20 Rule? It’s one that was coined by a U.S. senator and expert in financial matters Elizabeth Warren in her book All Your Worth: The Ultimate Lifetime Money Plan. In it she advises that you break down your budget into three distinct categories: needs, wants and savings.

Spend no more than 50% on needs

The first part of this rule is to take your after-tax (or net) income and put no more than 50% of it toward things you need to survive, such as food, housing, utilities, insurance, and minimum debt payments.

Spend no more than 30% on wants

While such things as cable and new clothes can feel like needs, these are things Warren includes in the want category. Certainly, dining out and money you spend on hobbies belong in the want category. A pair of shoes you like is a want, although a pair of shoes you have to buy because your only others have holes would be a need.

Spend 20% on savings

In this category, Warren includes retirement plans, emergency funds as well as any payments beyond the minimum you make on debt.

An example of how it works

If you take home $2,500 a month, under the 50-30-20 rule, you would spend $1,250 on needs such as mortgage or rent, groceries, electricity and the like.  You would then have $750 (20% of $2,500) to spend on wants and $500 to spend on savings.

You need to see if you’re coming up short in the needs category and then you might have to take from the wants category. But the goal is to eventually be able to budget using this ratio.

There are many critics of the 50-30-20 rule, with some saying it’s not realistic for many income levels (for instance, those who make very little money will often be forced to spend much more of their income on needs) or that while it seems simple it can be difficult, especially for those not used to budgeting, to distinguish between wants and needs.

But the 50-30-20 rule can be a start for those who don’t have a successful budget, or for those who find breaking their income down in this way helps with their financial planning and keeping them on track. Why not give it a try?


Sources:

https://www.thebalance.com/the-50-30-20-rule-of-thumb-453922

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