Senator Elizabeth Warren popularized the so-called '50/20/30 budget rule' (sometimes labeled '50-30-20') in her book, All Your Worth: The Ultimate Lifetime Money Plan. The basic rule is to divide up after-tax income and allocate it to: spending 50% on needs; 30% on wants; and socking away 20% to savings. Here, we briefly profile this easy-to-follow budgeting plan.
- The 50-20-30 (or 50-30-20) budget rule is an intuitive and simple plan to help people reach their financial goals.
- The rule states that you should spend up to 50% of your after-tax income of needs and obligations that you must-have or must-do.
- The remaining half should be split up to 20% savings and debt repayment and 30% to everything else that you might want.
Needs are those bills that you absolutely must pay and are the things necessary for survival. These include rent or mortgage payments, car payments, groceries, insurance, health care, minimum debt payment and utilities. These are your "must-haves" including items that you are contractually obligated to like debt payments or bills. The "needs" category does not include items that are extras, such as HBO, Netflix, Starbucks and dining out.
Half of your after-tax income should be all that you need to cover your needs and obligations. If you are spending more than that on your needs, you will have to either cut down on wants or try to downsize your lifestyle, perhaps to a smaller home or more modest car. Maybe carpooling or taking public transportation to work is a solution, or cooking home more often.
Wants are all the things you spend money on that are not absolutely essential. This includes dinner and movies out, that new handbag, tickets to sporting events, vacations, the latest electronics gadget and ultra-high-speed Internet. Anything in the 'wants' bucket is optional if you boil it down. You can work out at home instead of going to the gym; cook instead of eating out; watch sports on TV instead of getting tickets to the game.
This category also includes those upgrade decisions you make, such as choosing a costlier steak instead of a less expensive hamburger, buying a Mercedes instead of a more economical Honda or choosing between watching television using an antenna for free and spending money to watch cable TV. Basically, wants are all those little extras you spend money on that make life more enjoyable and entertaining.
Finally, try to allocate 20% of your net income to savings and investments. This includes adding money to an emergency fund in a bank savings account, making IRA contributions to a mutual fund account and investing in the stock market. You should have at least 3 months of emergency savings on hand in case you lose your job or an unforeseen even happens. After that, focus on retirement and meeting other financial goals down the road.