Everybody knows that budgeting is important for your financial health, and that keeping things as realistic as possible is equally as crucial. They say that every penny should have a purpose, but what if it were even simpler than that?
One of our favourite budgeting tools for those who easily get bogged down by numbers, or by life in general, is the 50/30/20 rule – a beautifully simple plan that can be easily tailored to your specific lifestyle requirements, and altered as needed.
The origin of the 50/30/20 rule
“All Your Worth: The Ultimate Lifetime Money Plan,” a book published in 2005, was written by current US Senator Elizabeth Warren and her daughter, Amelia Warren Tyagi. With over 20 years of research informing its pages, the book ultimately concludes that your budget need not be complicated in order to keep your finances in order. Instead, all you need to do is balance your finances across three overarching categories: needs, wants, and savings.
How it works
By putting aside 50% for needs, 30% for wants, and 20% for savings or debt payment, you can save yourself a whole lot of time and stress each month, and over time. Here’s the breakdown:
50% – Needs
50% of your after-tax income should cover your most necessary costs.
These are expenses you can’t avoid, such as rent, groceries, transportation, insurance, loan repayments, gas and hydro bills, etc.
30% – Wants
Non-essential expenses that improve your quality of life, but you could certainly live without them if needed, at least for some time. These are things like dining out, vacations, clothing, subscription services
20% – Savings
Putting aside 20% of your income after tax each month can help you build a sustainable savings plan – whether it’s for a down payment on a home, an emergency fund, or simply long-term savings that could go towards your RRSP or retirement.
Of course, further budgeting within each category is certainly something we recommend down the road, or as your expenses evolve. But for a basic budgeting rule that anyone can follow, this is definitely among our favourites.
For more advice on effectively managing your budget or help allocating your finances, contact us today and book your FREE 30-minute consultation. Let’s discuss your specific needs and wants and build a plan that works for you.