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The 50/30/20 budget rule breaks down your after-tax monthly income into three main categories: needs, wants, and savings (and debts are lumped in there, too).
It stipulates that you should spend 50% of your income on needs, 30% on wants, and 20% on savings and paying off any debts.
The 50/30/20 budget rule is one of the most effective spending methods you can use to align your expenditure and saving goals. This saving strategy ensures you do more than just pay your bills on time, but the 50/30/20 rule also enables you to determine how much you should spend and on what.
This budget rule is an excellent technique for diversifying your financial profile and fostering financial health. In this post, we’ll take you through everything you need to know about using this budgeting method.
• How the 50/30/20 Budget Rule Was Created
• Is the 50/30/20 Rule Necessary?
• How to Budget Your Money Using the 50/30/20 Rule
• 50/30/20 Budget Calculator
• Example of 50/30/20 Budget Plan
• 50/30/20 Budget Spreadsheet
• How Do You Include Your RRSP in the 50/30/20 Budget?
• When is the 50/30/20 Budget Rule Not Applicable?
• Make Your Life Easier with a 50/30/20 Budget
The 50/30/20 budget planner was introduced in the book by Senator Elizabeth Warren and Amelia Warren Tyagi (her daughter), “All Your Worth: The Ultimate Lifetime Money Plan.” It has since become one of the most popular budgeting techniques, thanks to its simplicity, flexibility, and adaptability to different stages of life.
You don’t need any special tools or know-how to make it work for you. This makes it an excellent tool for people who don’t know how to make a budget.
Unlike other methods that rely on the amount of income, the 50/30/20 rule relies on percentages of different spending categories. As a result, you can apply it to different scenarios.
If you don’t like detailed budget tabulations and complicated spreadsheets, then this budgeting strategy is definitely necessary in order to keep your finances in order.
The main reasons to use the 50/30/20 budgeting method are:
● Improving your credit: This money-in-money-out rule allows you to allocate cash to pay off debt and ultimately improve your credit score.
● Achieving your financial goals: Whether you want to pay for a new car, go on a summer vacation or put a deposit on a house, the 50/30/20 budgeting method makes it easy to save money.
● Improving spending habits: Many people live paycheck to paycheck as they overspend on unnecessary things. This financial tool can help you improve your spending habits because it guides you on where your money should and shouldn’t go.
● Holding yourself accountable: This reasonable budget strategy accounts for every dollar, giving you an incentive to stick to the plan.
● Helping prepare for an emergency: Life is full of unforeseen surprises. A 50/30/20 strategy allows you to put aside money for those emergencies, which may include becoming sick or injured, being laid off, going through a divorce, etc.
● Control over Your Finances: This type of budgeting technique is a financial roadmap that will improve your family relationships and give you a sense of direction for the future.
It’s not always easy to stick to a budget, especially if you are new to managing your finances. That said, identifying the reasons for saving can motivate you to achieve your financial goals.
If you don’t know how to start your budget, there are a few steps you can take, that include creating those three main categories of the 50/30/20 rule. Following these 5 easy steps can help you balance between goals, obligations, and splurges.
An after-tax income is the net income after all the state, federal and withholding taxes are deducted from your gross income. It represents the amount you have available to spend.
If you have a steady job, the after-tax income is indicated on the pay stubs. Self-employed individuals in Canada can calculate their after-tax income by deducting business expenses and taxes from their gross income.
Financial needs are the expenditures essential to living and working. These essential expenses include housing, utility bills, transport, clothing, and food. Set aside no more than 50% of your after-tax income for your monthly expenditure.
What if 50% of your income is not enough for all your essential expenses? This is a sign that you are living beyond your means and need to adjust your lifestyle accordingly. That’s not always possible to change immediately, and if you are in need of immediate funds, applying for an e-Transfer payday loan with iCash is a great way to cover those necessities.
Wants are the expenses that make you happy and let you enjoy life, either daily or monthly. These include entertainment, traveling, gym memberships, dining out, and designer clothing. In your 50/30/20 budget, allocate 30% of your income for your wants.
The fewer the expenses in this category, the more you can save for a rainy day.
The final 20% of the 50/30/20 rule should go towards paying off debt and securing your financial future through savings. Make sure you have enough emergency savings to last you three months if you lose your job.
Otherwise, if employment insurance is not enough during the time that you are not working, you may need to borrow money from friends, family or apply for an online payday loan from a direct lender just to get by.
Once you’ve cleared your debt and have set aside an emergency fund with the 50/30/20 rule, it is recommended that you work on your retirement fund and achieve any other financial goals you may have.
A budget means nothing if you don’t stick to it. Once you’ve broken everything down in to those three main categories, you’ll have a better picture of how you spend your income each month.
If your living expenses are high, consider implementing some of our budgeting tips to save more. Also, you don’t have to spend all the money you’ve set aside for your “wants.” If you have a balance in this category, move it to savings.
To quickly calculate your spending habits per month, consider using our 50/30/20 budget calculator, which will show you how much you should be putting aside for your needs, wants, and savings according to your after-tax income.
50/30/20 Calculator
Monthly after-tax income $1,500
Here’s how much you have for:
- Essentials $750
- Wants $450
- Savings $300
Let’s have a look at an example of how to implement the 50/30/20 budget plan using actual income and spending amounts.
Let’s say you earn $5,000 every month. According to the 50/30/20 rule, you can only spend $2,500 on needs per month, and no more than $1,500 on wants. The remaining $1,000 can be used for savings or to repay debt.
Consider shifting some of the “wants” money to the “needs” column if your monthly rent or mortgage is too high so you can have enough money for other expenses.
Additionally, review your needs to see what you can do to make the budget more manageable. For instance, a credit card with a lower interest rate or cheaper insurance will reduce some recurring expenses.
If you would like to create a more in-depth budget, then a 50/30/20 budget spreadsheet comes in handy.
Spreadsheet software like Google Sheets, Apple Numbers and Microsoft Excel all have ready 50/30/20 templates to help make your budgeting fast and easy.
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You can include your RRSP (an acronym for Registered Retirement Savings Plan)in the savings category of your monthly budgeting strategy. This, together with other savings, should add up to 20% of your after-tax income. For instance, you can devote half of your monthly savings (10% of your income after tax) to the retirement account, and the rest can go into an emergency savings account or a debt-repayment plan.
Unfortunately, life is not always straightforward, and there are scenarios where the 50/30/20 rule may not be applicable.
For example, making minimum payments won’t get you out of credit card debt quickly. With companies charging as high as 20% interest rates, it makes more sense to prioritize paying off debt over saving in that situation.
What’s more, this monthly budgeting strategy doesn’t work for all income levels. Junior employees and college students are almost always forced to spend 80% of their income on needs alone. This means lower savings and money for shopping “wants.”
Additionally, many people have to spend 40%-50% of their net income on debt. This makes it challenging to set significant savings aside, even after cutting living expenses to the bare minimum. The same applies to individuals planning to retire early as they are forced to save a more significant percentage of their paycheque.
For high-income earners, the 50/30/20 rule may need some tweaking. For example, if you earn $20,000 in after-tax income, spending $6,000 every month on wants may be a little on the high end.
If the 50/30/20 rule doesn’t work for you, there are a few alternatives you can try that include:
This is where you spend 30% of your after-tax income on living expenses, 10% on wants, and save 60%.
It is an excellent plan if you want to get out of debt fast while saving for the future. It’s especially viable for individuals with very few expenses.
This budgeting technique splits your income into four categories:
● 30% for housing expenses
● 30% for childcare, groceries, and other household expenses
● 30% for debt repayment
● 10% on entertainment and other wants
This budgeting method is especially useful for families.
This budget strategy ensures that you have allocated every dollar of your income to a specific expense, savings account or debt. This can help deter unnecessary spending because you will know how much you have to spend per item.
This saving/spending strategy helps you track the amount of money you have in every category by tucking away cash in envelopes. Each category of your budget gets an envelope, and you only spend what is in each specific envelope.
This budgeting strategy doesn’t need any regular updating of records. It helps to keep you on track, holds you accountable, and makes it extremely difficult to overspend.
The cash envelope system is a good alternative for low-income earners who find it difficult to save. That said, this system has a downside: It is not practical for cashless transactions.
The 50/30/20 budgeting rule is an easy way to streamline your finances. There are only three categories to keep track of (needs, wants and savings), which eliminates the stress of constant calculations.
While this budget rule may not be practical in some situations, you can always make adjustments and create a monthly strategy that allows you to pay off debt, meet daily obligations, save and invest, and still have fun. Besides, successful budgeting is about finding the right balance and discipline.
With a 50/30/20 budget, getting loans in Canada is easy because you know how and when you can repay them without stress.
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