At Last, The Secret To the 50/30/20 Rule For Budgeting Is Revealed

At Last, The Secret To the 50/30/20 Rule Is Revealed

Author and podcast guest Shari Greco Reiches’ depiction of the 50/30/20 rule in her book, *Maximize Your Return on Life*.

03.11.2022 - By: Anastasia Barbuzzi

If you’ve ever looked into budgeting, chances are you’ve heard of the 50/30/20 rule. And if you’ve been listening to $HMONEY Radio over the last couple months, chances are you heard finance expert Shari Greco Reiches talk about the 50/30/20 rule for budgeting.

Now, if you haven’t listened to Shari’s episode of the podcast, no biggie! I’m here to give you the lowdown on the 50/30/20 financial plan, just like I gave you all the deets on Shari’s popular clutter quiz.

When you finish reading this blog post, you’ll have a solid grasp on the following:

Where the 50/30/20 rule originated from
How to use the 50/30/20 rule budgeting framework
The 50/30/20 rule categories to consider
Resources to help you be successful with a personalized 50/30/20 financial plan

First, why don’t we start with this budgeting method’s origin story?

Senator Elizabeth Warren’s *All Your Worth*.

Where did the 50/30/20 rule come from?

The 50/20/30 method first showed up in U.S. Senator Elizabeth Warren’s book that was published in 2005 called All Your Worth. According to Canada’s KOHO, the book was originally named the 50/20/30 rule.

What is the 50/30/20 budget rule and how does it work?

Basically, the 50/20/30 rule for budgeting divides your spending and saving into three categories. These categories are to be divided from your after-tax income:

1) Needs (50%)

According to Shari, your “needs” should include your most basic needs. There is not much you can do to change these numbers, unless you are willing to make some lifestyle changes. Your needs should include (check all that apply to you):

Groceries
Health insurance (if it’s not already deducted from your paycheque)
Medical expenses
Minimum loan payments
Childcare and other expenses allowing you to work
Alimony
Child support
Transportation
- public transportation, car payments, gas, repairs and maintenance on your vehicle
Housing (mortgage or rent)
- real estate taxes, homeowners insurance, repairs and maintenance, basic utilities

2) Wants (30%)

In her book, Maximize Your Return on Life, Shari says that your “wants” are more discretionary items, so you have a bit more flexibility in this category. Examples of your “wants” will include:

Dining out/entertainment
Travel
Luxury purchases (i.e jewelry)
Hobby spending
Gym memberships

3) Savings (20%)

When it comes to the last piece of the 50/30/20 rule pie, there’s one category that should be prioritized next to your “needs” — your savings. This 20% slice is reserved for debt repayment and savings. Take for example…

Credit card balances
Student loan payments
Other personal loans
Your emergency/rainy day fund (3-6 months of spending in a savings account)
Retirement plans
Savings for large purchases (future home or car down payment)
College/university savings
Additional investment savings

A better look at Shari’s description of the 50/30/20 rule.

Is the 50 30 20 rule weekly or monthly?

Simply put, the 50/30/20 rule is a monthly money management technique.

How the 50/30/20 breaks down:

Before you can break down your 50/30/20 rule categories, you have to determine your net income. RateHub says that your net income is the amount of your paycheque after all the deductions, such as Canada Pension Plan (CPP) contributions, employment insurance (EI) premiums, health insurance, and federal and provincial/territorial taxes.

One thing to keep in mind is that your take-home pay normally increases as you near the end of the year, and that's because you've hit the annual maximum amounts for CPP and EI. Keep this tidbit in your back pocket when you’re calculating your net income.

Thankfully, there’s a number of free resources that you can use to help calculate your budget and net income much easier. I recommend checking out NerdWallet’s free 50/30/20 budget calculator, as well as their 50/30/20 monthly budget worksheet.

Why is the 50/30/20 rule easy to follow?

The 50/30/20 rule is easy to follow because knowing exactly how much money you should be dedicating to each category takes the stress out of budgeting. The 50/30/20 budgeting framework also serves as the foundation of your budget. The best part? You can always adjust things if need be.

Although it can take some time to organize your 50/30/20 rule categories, this financial plan is easy to follow when you get everything sorted out. If you can create a visual representation of your 50/30/20 financial plan, even better! A simple pie chart works, just like the example from Shari’s book that we showed you above.

Where does credit card debt go in the 50/30/20 rule?

Credit card debt is included in the 20% slice of your 50/30/20 pie that’s dedicated to debt repayment and savings. You should allocate some of your budget in this category toward a combination of paying down debt and saving for the future.

Photo-illustration by Stevie Remsberg, seen in New York Magazine.

So, How Do You Start Your 50/30/20 Financial Plan?

There’s no way around it — you must calculate your after-tax income on average. This is your starting point. If you don’t have this number, you cannot start working on each category’s maximum budget.

Once you’ve got the numbers, it’s helpful to take a look at your spending habits over at least six months and start identifying which segment those particular expenses fit into. “Was it a need or a want?” can be a difficult question to ask, especially if you’ve been spendy.

However, asking yourself the hard questions can bring about some hard truths: what do you truly value? how can you better your current financial situation? did you (and you alone) put yourself here?

What’s the big secret about the 50/30/20 rule?

I promised you the answer to this question in the title of this blog post, didn’t I? Well, here it is: the budgeting process is all about choices, and some can be tough to make. With that, your spending reflects your core values. If there’s anything that Shari’s book has taught me, it’s this.

When you’re making spending decisions, use your core values as a guide. For example, if you value clean water, choose a new water bottle that doesn’t contain plastic. Using this core value as a compass while shopping can help you avoid some costly choices for your budget and your conscience.

Lastly, keep these two questions in mind when buying something:

1) Does the purchase fit in your budget?

2) Does your spending align with your core values?

If the answer to both is yes, then hit *add to cart* my friend.

Have questions about the 50/30/20 rule for budgeting? Leave them in the comments below and I’ll get you an answer!

Wondering about a 50/30/20 free budget template? Clearly offers this awesome template with a great example inside!