Keeping a budget is a good way to avoid spending more than you can afford. It ensures you don’t get into debt and can help you save money to reach your goals.
When you research budgeting, you’ll notice that everyone has an opinion on which budgeting strategy works best, but a good starting point for beginners is the 50/30/20 rule.
If you want to learn how to budget using the 50/30/20 rule, this guide is for you.
What is the 50/30/20 budgeting rule?
The 50/30/20 rule is a popular budgeting strategy created by US Senator Elizabeth Warren and Amelia Warren Tyagi in their book, All Your Worth: The Ultimate Lifetime Money Plan.
You allocate your after-tax income into three groups: 50% for needs, 30% for wants, and 20% for savings or debt repayments.
The 50/30/20 rule helps you prioritize what you need to pay while also helping you to reduce spending in other areas so that you can put more money towards debts or savings.
For example, if your monthly take-home pay is $2,500, you would spend $1,250 on needs, $750 on wants and $500 on savings.
How to create a budget plan using the 50/30/20 rule
The 50/30/20 rule is as simple as it sounds; it’s a straightforward process that divides your income into three simple categories.
Budget 50% for needs
Needs are the expenses you need to pay from every paycheque before anything else. Among other things, these expenses put food on the table, keep a roof over your head, and provide light and warmth.
Your needs may include some of the following:
- Rent or mortgage payments
- Bills and utilities
- Groceries
- Healthcare
- Transportation
- Insurance
- Child care
- Minimum debt repayments (e.g. credit card bill)
The aim is to ensure you can pay for everything you need to survive with half of your paycheque. If you are spending more, look for ways to reduce expenses that go up and down regularly, such as groceries, utilities and transportation.
For ways to save money, try some of these money-saving tips. If you’re struggling to meet your debt repayments, check out our guide on how to get out of debt.
If you have yearly expenses, spread the costs over your monthly budget by dividing the total by twelve.
Budget 30% for wants
Wants are your non-essential spending, such as:
- Eating out and takeout
- Entertainment (e.g. movies and sports tickets)
- Going out with friends
- Subscriptions
- Shopping
Once you start to categorize your spending, you will notice that many ‘needs’ are really ‘wants.’
Some grocery items might be a luxury rather than a necessity, and a cheaper alternative to an Uber is walking, biking or riding the streetcar.
Try to spend less than 30% on wants so you can put the extra money into your savings.
Budget 20% for savings or repaying debt
After caring for your basic needs and wants, you can allocate the leftover money to savings or clearing your debts. Ideally, try to save 20% of your paycheque.
Paying off debts with high interest rates (credit card debt and loans) should be first on your list, then move on to your other debts. Build long-term savings; a good way to save money is to use a tax-advantaged account like an RRSP or TFSA.
It’s also good to have enough money saved to cover at least three months of basic expenses to draw on in case of job loss or unexpected costs, such as car repairs.
Is the 50/30/20 rule realistic?
The 50/30/20 budgeting rule may not work for everyone. Use the percentages as a guideline and adjust your budget based on your income, expenses, and financial goals to ensure it’s realistic.
Tips for budgeting using the 50/30/20 rule
To establish your budget, calculate how much you earn after tax and divide it into each budget group:
- Needs: 50%
- Wants: 30%
- Savings: 20%
You can use our 50/30/20 budget calculator to automatically divide your income.
Review your bank accounts, credit card statements and receipts to examine your spending patterns over the last few months and label each expense as a need or a want.
Add up your expenses for each category to determine whether your budget is balanced. If you’re spending too much in one category, look for ways to reduce your spending.
Can you adopt better money habits to save money or increase your income? Can you reduce your grocery spending or cancel subscriptions you can live without?
Once you perfect your 50/30/20 budget, try it for a month to ensure it’s realistic.
Alternatives to the 50/30/20 budgeting rule
While the 50/30/20 budgeting rule is in trend at the moment, there are some 50/30/20 budget alternatives that might fit better.
When you use a zero-based budget, you allocate every dollar of your income to individual categories until no money is left.
This approach can be more time-consuming but provides a detailed account of your spending. Budgeting apps like YNAB use zero-based budgeting.
Another alternative is the envelope budgeting method. You split your income into envelopes for specific expenses, such as groceries or entertainment.
You can only spend what’s in each envelope. If you put $200 in the grocery envelope, you can only spend that amount. This is a strict way to avoid overspending.
Wrapping up
Budgeting isn’t easy, but it is rewarding in the long run. The 50/30/20 budgeting rule is a good place to start and can be tweaked to suit your financial situation. When trying to save or pay down debt aggressively, adjust your needs and wants accordingly.
Ultimately, the best budgeting method depends on your financial situation and goals. Explore different options and find a method that works for you.
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