Apply The 50/30/20 Rule To Your Life For Financial Success
Budgeting using the 50/30/20 rule is one of the simplest ways of budgeting for new kids on the financial block.
You may also know this as the 50/20/30 rule of budgeting but in all honesty it’s a balanced approach to savings, debt, and survival.
This plan of budget attack became popular after Senator Elizabeth Warren published her book, All Your Worth: The Ultimate Lifetime Money Plan.
Some people who have been budgeting for years continue to use this success formula even after they become debt-free.
Why? Because it works for them and why change something that works right?
With any budgeting system, the core values of it have to be that you are earning, saving, and spending.
Those three are a reality for everyone when it comes to their net income.
However, if you stop to consider budgeting you’ll realize it’s simply an automatic system of standardization.
By this I mean it’s a means to get the user to pay attention to where their money is going and understanding why.
It’s also teaching the user how to make improvements and whether they are paying down debts fast enough and saving enough for their future.
In essence, you’re creating a book of your present and future life so make sure it’s a journey worth walking.
Is The 50/30/20 Rule Budget For Us?
We’re struggling financially since COVID-19 as I’ve been laid off and working with a limited amount of money.
My wife continues to work from home earning her full income which we are thankful for.
As of now we are living on a tight amount of money but all of the bills are getting paid.
It scares us and we know we need to do something now before it gets any worse.
We were talking last night and decided that we need to start budgeting but don’t know where to start.
I’ve been following your blog for a while now out of curiosity since I found out you were debt-free.
In a way I’m jealous but I’m also wanting to know what I need to do to achieve this success for my family.
I’ve done some research on different budgets and came across the 50/30/20 rule which seems easy enough.
- What are your thoughts about this budget?
- Have you used the 50/30/20 budget?
- Where should we begin with our budget in terms of education?
Thanks for any help.
C and R
Thanks for your questions C and R from Alberta, Canada.
Beginning A Budgeting Journey
When we started budgeting journey around mid-2011 it started with using our bank account as tracking.
We would simply track what was going in and out and as you know this is not even close to budgeting.
It’s amazing looking back what we thought we were doing was right, but we all make mistakes.
That’s why I’m here to tell you that we’ve been where you are.
We’ve had tonnes of debt, paid bills on minimum wage, lost a job, and suffered severe health issues.
Sometimes we think if it could happen to us, it has however we’ve made it through the fire successfully.
That’s why it was important for us to share our journey on this blog to let other’s know it is possible to become debt-free.
Honestly, when this blog began we were still paying our mortgage and sharing our monthly budgets for our readers.
At first we were skeptical about whether to share our financial information but it has proven to help so many people.
It was tough at times especially when we wanted to go on holidays but chose to do short road trips in the summer.
We gave up lots of big things to pay off our mortgage in 5 years and it was worth it from start to finish.
Finding The Right Budget
The budgeting system that we use is the zero-based budget however there are no hard rules on what budget to use for success.
The important part is that you are budgeting or using some financial system that is at minimum tracking four things:
- Net Income
- Debt Repayment
There are many types of budgets out there but one of the favourites is the 50/20/30 rule of budgeting.
We have never used the 50/20/30 budget but it does come highly sought-after for its simplicity.
It’s only fair that I’m transparent on this blog because you want to learn from someone truthful.
What I can tell you is this type of budget might work for you.
The only way to find out whether a budget fits your lifestyle is to try it out and see what happens.
We didn’t jump into our excel budget spreadsheet without first as we transitioned from a paper budget.
Wanting more means you’ve mastered the simple budget and now want more financial data.
For example, if you want to know exactly how much money you spent on groceries every month or for the entire year you can do that with an excel budget.
Perhaps you want to know how much money you paid back in credit card debt or set aside for savings throughout the year.
Having data such as this at your fingertips may be the motivation you need to continue building your financial empire.
The 50/30/20 Rule of Budgeting Explained
Tracking is key and no matter what type of budget you use building a budget binder of tracking sheets is worthwhile.
Next to the basic bare-bones budget, the 50/20/30 rule offers the considers three rule sections.
- #1 Rule is using 50% of your Net Income towards your Needs.
- #2 Rule is using 20% of your Net Income towards your Savings.
- #3 Rule is using 30% of your Net Income towards your Wants.
Let’s break this budgeting system down a little further to give you more insight.
50% Needs of the 50/30/20 rule
You have $1000 to spend in this category of your $2000 net income using 50%.
The equation goes like this Net Income $2000 x 0.50 = $1000.
Let’s talk about what needs are when it comes to your budget.
Needs are expenses that you must pay for every month no matter what just to survive.
Using 50% of your net income or after-tax income on your needs is part of this budget rule.
For example, if you net $2000 a month then 50% of that is $1000 and must go towards your needs.
Spending More Than 50% On Needs
If you are spending more than 50% on your needs then you must do one of two things.
- Earn more money
- Lower expenses
These needs won’t impact your quality of life or you can find ways to save money while lowering your expenses.
My favourite when I was living in the UK is using the program Nielsen Scan Canada to earn points towards gift cards or other items.
I bought a new refrigerator with my points just before I moved to Canada.
It helped sell my house faster with a new kitchen that I installed from Ikea and a new mini-fridge.
The idea is to target what you can change including your lifestyle especially if it’s over the top costly.
Owning that big house might not be working for your budget so perhaps consider downsizing.
The vehicle that costs too much to maintain and the monthly payments are too high, sell it, and buy something economical.
The 50% needs category might include the following;
- Housing including property taxes
- Basic Utilities (Gas, Hydro, Water, Water Heater rental, etc.)
- Vehicle Payment/Bus Pass
- Debt Repayment (minimum payment)
- Insurance such as house insurance, tenants insurance or life insurance
- Prescriptions and Healthcare
So you’ve spent $1000 of your $2000 net income in the needs category.
You have $1000 left to spend in the savings and wants category of the 50/30/20 rule budget.
30% of the 50/30/20 rule for Wants
You have $600 to spend in this category of your $2000 net income using 30%.
The equation goes like this Net Income $2000 x 0.30 = $600.
This is the category that you can make changes to because they are non-essential to your budget.
Wants are simply things you desire to have but can still survive without them.
For example, if your Needs category is too high and you need money then this is where it will come from.
You’ll simply be using money from one bin to put into the other which is why you must balance your budget.
As I mentioned above you have to evaluate your lifestyle and change it according to what you can afford.
- Concert Tickets, Sports tickets, Car show tickets, etc.
- Summer fun tickets for the family (Great Wolf Lodge, Wonderland, Toronto Zoo, Niagara Falls, etc.)
- Participating in sports teams
- Road Trips
- Travelling for Leisure
- Eating Out at restaurants or fast food
- Buying high-end foods you don’t normally buy
- Splurging on a new outfit or pair of shoes
- Buying gadgets, tools or other items you can get away with doing without
- Gym membership
- Magazine subscriptions
- Online subscriptions (Amazon Prime, Netflix, Spotify)
- Television, the Internet, Telephone, Mobile Phone
20% Savings and Debt Repayment
You have $400 to spend in this category of your $2000 net income using 20%.
The equation goes like this Net Income $2000 x 0.20 = $400.
This part of the 50/3020 rule of budgeting is meant for investing in such things as your retirement.
You may want to consider contributing to;
- Registered Retirement Savings Fund (RRSP)
- Tax-Free Savings Account
- Registered Education Savings Plan (RESP)
If you still have a student loan this is where you will want to add extra to that debt to crush it faster.
If your employer has a retirement program at work where they match a certain percentage, take advantage of that too.
The idea is to balance this 20% so it works the smartest for you financially.
Final Thoughts 50/30/20 Rule of Budgeting
I think this way of budgeting is great for beginners who want to get their feet wet.
It’s a system where you plant the seeds with your net income (take-home pay) and with each step, you grow towards debt freedom.
At least that’s the way I see it although I view almost every budget in this sense as the main goal is to rid of debt.
However, I think spending 30% of my net income on ‘wants’ is a bit much.
I’d spend more time on saving money and paying off debt so I can live debt-free.
The good thing about this type of budget is that you can allocate percentages of how you see fit.
For example you might want to do a 60/20/40 or a 70/10/20 budget.
So 70% for Needs, 10% Wants, and 20% to Savings and Debt Repayment.
Lastly for C and R I would suggest educating yourself on budgets by reading my 10 Step Budget Mini-Series.
It’s jam-packed full of information that we used along our journey to debt freedom.
I trust you will find bounties of information that will help you get started.
The only way to know if this 50/30/20 budget strategy will work for you is to test it out.
Discussion: Have you used the 50/30/20 budget rules before and what did you think of it?
I’d love to read your comments and experiences so please leave them below.