A Budgeting Guideline That Will Change Your Life

I’ve mentioned before that I do a lot of budget planning in my 9-5 corporate job. And I love the concepts so much that I also help others budget and plan their personal finances on evenings and weekends. But not everyone loves a detailed budget spreadsheet as much as I do. Fortunately for those who don’t, we have some general guidelines.

Have you heard of the 50/30/20 rule? If not, settle in because this guideline can make creating your budget much easier than you think!

The 50/30/20 rule originated in the 2005 book All Your Worth: The Ultimate Lifetime Money Plan by Elizabeth Warren and her daughter Amelia Warren Tyagi. Elizabeth Warren is a law professor specializing in bankruptcy, and her vast research of household financial struggles led her to build this framework to help individuals manage their finances sustainably. The concept has become so popular that large investing firms like Fidelity and trusted money resources like Nerd Wallet have adopted the advice.

The rule suggests allocating your take-home pay into three buckets:

• 50% for Needs: Essentials like housing, utilities, groceries, transportation, debt payments, and insurance.

• 30% for Wants: Discretionary spending such as dining out, entertainment, and hobbies.

• 20% for Savings: Building savings and investing.

I love this as a general guideline, as it encourages us to live for today while setting aside for our futures. Because it’s based in percentages, it can apply to most income levels. In my opinion 50/30/20 should not be a hard and fast rule, as personal finance is personal, but it should serve as a helpful framework when first starting a budget.

Some other thoughts to keep in mind:

Prioritize in this order:

1) Needs — make sure your basic needs are covered first and foremost

2) Saving — set some aside for the future

3) Wants — even though it’s last on the list, be sure you’re giving your discretionary spending some attention in your budget

We Prioritize Needs, But We Set Aside Savings First

Pay yourself first, friend. Aim to set aside 20% of your take home pay for your future self. Whether it’s in an IRA, an emergency fund in an HYSA, a big dream fund in a brokerage account, or a little of each, make sure that your saving is prioritized. Get that 20% out of sight and out of mind right away!

Once your savings is socked away, move to the rest of your pay that you can allocate to needs and wants.

Know What You Can Afford

The 50/30/20 split is huge for planning! Let’s say you’re considering a big purchase like a new home. If you’re spending 40% of your take-home on needs right now and with this new home, you want to aim for a 50/30/20 split. Find that 50% number, and now you know what you can afford! But don’t forget to reduce your wants and save categories so you don’t start spending more than you make!

Maybe it’s something like an extra vacation every year — a want. If right now, you’re spending 70/20/10, you can’t afford that extra annual trip until you get your needs-based spending down and savings up.

Try to Do the Same Splits with Windfalls

Did you get a year-end bonus? Or a generous cash gift for Christmas? Yay! First celebrate, then split it the same way, allocating 20% to save, 30% on something you want, and 50% toward something you need. Here’s an example.

Let’s say you got $200 from a loved one as a gift. Here’s one way your could divide it — Sock away $40 in a high yield savings account right away. Then put $100 toward your credit card debt. Then spend the remaining $60 on that fun thing you’ve been eying all holiday season!

Or maybe you received a bonus of $2,000 from your workplace as an annual bonus — You could save $400 in your Big Dream fund, use $1,000 to pay down a student loan, and put $600 in a sub-savings account for an upcoming trip.

The specific plan can be customized to your situation, but having these guidelines in your tool belt will make those spending decisions easier and help you direct your money where to go, rather than wondering where it went.

Customize For Your Situation

Is 50/30/20 possible or necessary for everyone? Nope. Everyone’s situation is different and our personal finance seasons change.

For a personal example, my husband and I didn’t invest in retirement at all while we were paying off our debt (we got bad advice; I don’t recommend). To catch up from those couple years and prep for our kids’ future education, we are saving and investing more heavily than the guideline prescribes right now. Our split is more like 50/25/25, and it works for us in this life phase.

For a comfortably-retired couple with a paid off home, the ratio might also look different because less saving is necessary and less needs-based spending is required.

And while it might go without saying, I’ll say it. If you have a low income — even just for a season — those basic needs will demand a greater percentage of your take-home. In that case, whether for a short season or long-term, you can aim to save what you can, prioritizing your basic needs over discretionary spending.

But no matter your situation, this 50/30/20 rule is a guidepost to try to aim toward. So evaluate your situation and see how you’re stacking up. Feel free to even tweak your ratios to suit your life right now, continually aiming for that ideal split.

Do you employ this guideline in your own budget? If not, are you planning to use this helpful framework for yourself? Share in the comments!

Need help getting started? Don’t wait — contact me for guidance and tools to create your budget today!