Use the 50/30/20 Budgeting Rule and Never Feel Inadequate Again

Becca Tapert

Have you heard of the 50/30/20 Budgeting Rule before?

It was coined by Elizabeth Warren, U.S. Senator from Massachusetts and named by TIME magazine as one of the 100 Most Influential People in the World. She co-authored a book on spending and saving with her daughter called “All Your Worth: The Ultimate Lifetime Money Plan.”

Essentially it shows you how much you should ideally spend and save based on your income.

Here’s what it looks like:

Step 1: Calculate Your After-Tax Income

In order to start budgeting, you’ll need to know your after-tax income. This just means, how much of your paycheck is left after state tax, local tax, income tax, Medicare and Social Security is taken out.

If you get regular paychecks, this should be quite easy to figure out as it’s broken out on the paystub.

Take a look at your paystub. If you have health care, retirement contributions, or other types of deductions taken out, add them back into your after-tax income amount.

Step 2: Needs Should Account for 50% of Your After-Tax Income 

50% of your spending should go towards “Needs.

This includes:

  • Housing
  • Utilities
  • Groceries
  • Insurance (Health, Auto etc)
  • Car Payments

Sometimes “Needs” and “Wants” could be hard to differentiate though, so basically, anything that would severely impact life, like electricity and prescription medicines, is a need.

And anything that slightly inconveniences your life if missing, such as cable or new clothing, is a want.

Step 3: Wants Should Account for 30%

You might spend more on the “Wants” section than you think.

This includes:

  • Dining Out
  • Shopping
  • Hobbies

Even that unlimited texting/data plan, new phone, or other niceties of life counts under “Want.”

List out everything you currently pay for and really determine if it’s a “Want” or a “Need.” Most of the time, it’s a “Want” which shrinks your 30% for really nice things considerably.

Step 4: The Remaining 20% Goes to Savings

You should spend at least 20% of your after-tax income repaying debts, saving for an emergency fund, and saving in your retirement accounts.

If you carry a mortgage or car loan, the minimum payment goes towards “Needs” and anything extra counts towards “Savings.

Same with if you carry a credit card balance. The minimum payment on the credit card falls under “Needs” and anything extra for additional debt repayment falls under the 20% Savings.

And voila! You’ve made a budget that you can stick to. Happy budgeting!

 

Top Ranked Apps