The 50/30/20 Budgeting Rule

The 50/30/20 budgeting rule was popularized by Senator Elizabeth Warren in her book All Your Worth: The Ultimate Lifetime Money Plan. In this book, she shares that balance is key when it comes to controlling your money. It's not about the nitty-gritty penny tracking but peace of mind.

Where your money goes

It can be worth it for some to spend 50% of their after-tax income on their rent or housing while saving on leisure and entertainment. It could also be worth it for another to splurge on food, leisure, and entertainment while keeping their other costs minimal.

I used to feel overwhelmed and uninterested in budgeting because it feels like a diet. Like cutting calories, cutting expenses is never fun. Instead, finding a balance is a far better approach.

You can't expect anyone to completely cut out the little things they love, they would go crazy. I know I would. I did... Personal finance is about creating freedom. It's not restricting yourself to the point of not enjoying your life. What is the point of creating more wealth otherwise?

The great thing about this rule is that it makes budgeting much easier and more personalized to you! You have bills to pay and dreams but it doesn't mean you can't have fun. You can divide your monthly after-tax income however you want. But, make sure that it respects these three categories of spending.

Spending 1: needs (50% of your income)

The needs cover all expenses that are necessary and unavoidable. These are the essentials that you could not live without.

These include rent, house payments, property insurance, food, electricity, water, transportation, etc.

Spending 2: wants (30% of your income)

The wants cover all expenses that would be nice to have. While they are not essentials, they add value to your life. Balancing your budget by allocating for fun is important.

These include entertainment, take-out, fine dining, subscription services, electronic gadgets, and new clothes and shoes.

This category is often the one that is the most difficult to figure out. It can be hard to distinguish between what you need and want in the moment.

There are almost too many options these days. Unless you can afford the premium, choose the basic alternative. It is friendlier for your financial security and means more wants for your buck.

Let's look at a Honda or a Toyota vs a BMW or a Porsche for example. They can all get you from point A to point B; yet, the latter is much more expensive to get and maintain.

This is the same for any other wants such as clothes, electronic gadgets, and furniture. Splurging is okay, but it is up to you to decide what to splurge on and if you can afford it!‍

Spending 3: savings (20% of your income)

The savings cover how much you keep for yourself at the end of the month. This what prepares you for the future. Start paying down your debts and adding to your savings. The savings help create a financial cushion and peace of mind in the event something happens. It's not a matter of if, but when so it will come in handy.

The savings allocation includes an emergency fund, retirement savings through a Tax-Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP).

General personal financial advice does not account for everyone's reality so it's important to tailor them to your needs.

What matters in the 50/30/20 rule of budgeting is how much you save.

You will spend the budget allocated to your wants and needs; but, what you save and invest will help you pay for your dreams, emergencies, and future expenses.

Personal finance is very personal and so should your budgeting be! The 50/30/20 budgeting rule makes it easier for you to set limits to what you can spend. It helps ensure you don't overextend yourself financially. At the same time, make sure to allocate for some fun! We're told not to spend so much on money $5 lattes or coffee but if that is something that brings you happiness, go for it! Allocate for it, cut back from elsewhere and enjoy! You work hard so you deserve to enjoy the little things that make you happy in life!