Employ the 50-30-20 Rule

I’ve always found preparing a household budget a challenge. The categories of spending seem to be never ending. Mortgage payments, homeowners insurance, property taxes, car payments, auto insurance, gas, tolls, auto club, groceries, electric, water, sewer, cable, Internet, cell phone, child care, entertainment, clothing, vacations, savings, loans, medical insurance and bills. The list goes on and on.

Trying to determine what percentage of our income or what dollar amount to budget to each category is overwhelming and therefore a great excuse to just avoid the budgeting process. But instead of avoiding the preparation of a budget, I’d like to encourage you to employ the 50-30-20 Rule to determine how best to spend your money.

You may already be familiar with this budgeting plan since it’s been featured by MSN Money, Forbes, and Mint. Senator Elizabeth Warren, known as a champion of the consumer, has spoken of the plan frequently, and while it still requires putting pencil to paper to work out a budget, by using only three categories it’s much more manageable.

Here’s how it works:

The plan divides your after-tax income or take home pay into three categories: needs, wants, and savings/debt.

50% of your income is devoted to needs – These are the expenses that MUST be paid every month like rent or mortgage payments, groceries, car loans and insurance, and minimum payments on credit cards

30% goes for wants – This category may not be an “fun” as you expect. Sure it’s going out to dinner or a movie, but it’s also other lifestyle choices that seem mandatory in this day and age. Things like cell phone plans, Internet, and cable. A gym membership, hair appointments, and make-up may seem like must-haves, but those fall in the wants category as well.

20% is for savings and debt reduction – While the smallest portion of the budget, the savings/debt reduction is extremely important. Money must be devoted to saving for an emergency and retirement, but this is also where money comes from to pay down credit cards or other debt.

In some cases it’s still a little tricky to determine the difference between a need a want. Phone service is a need, but the difference between a basic plan and a more expensive plan would be classified as a want so that one bill may span two categories. Yes, clothing is a need, but is it something you need today? If not, it may be a want. You’ll need to play with this according to your own expenses since no two people or families are exactly alike.

Of course, this doesn’t happen overnight. It’s a goal. Something to work toward. Don’t be discouraged if you can’t do this today, but by using the 50-30-20 Rule as a guide, you can start working toward establishing a budget that helps you accomplish what you need to do now and in the future.

I believe that by simplifying budgeting into needs, wants, and savings, we could have been more successful at an earlier age and as a result done a better job of saving.

Set a goal to employ the 50-30-20 Rule.



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