If you’re looking for a simple and effective way to organize your spending, the 50/20/30 budget rule may be the perfect fit for you. Figuring out your finances can be confusing, and if you don’t know where to start, this budgeting rule is a non-intimidating way to manage your after-tax income. It allows you to focus on your savings and financial goals, while also paying for your expenses and having some fun along the way. It helps you build more structure into your spending habits and makes it easier to reach your financial goals. Let’s dive in!
What Is The 50/20/30 Budget Rule?
The 50/20/30 budget rule was created by US Senator Elizabeth Warren and her daughter Amelia Warren Tyagi. The rule divides your after-tax income into three categories: 50% for needs, 20% for savings and 30% for wants. Needs are bills you absolutely must pay and things you rely on for survival. They’re essentials. These include rent or mortgage payments, groceries, insurance, minimum debt payments, child care costs and utilities. The rule concludes that half your after-tax income should be all you need to cover your needs and obligations, although this may be unrealistic for those with low incomes, or those who live in areas with high living costs.
Wants are all the things you spend money on that aren’t essential. This includes vacations, going out to dinner, monthly streaming services like Netflix, your morning coffee run, the latest iPhone, gym classes, tickets to sporting events, going to a concert, etc. None of these things are essential to your survival, but they’re nice to have. That being said, the less you spend on “wants” the more you can put into savings.
That brings us to the 20%. 20% of your after-tax income should be going towards your savings and financial goals. This category covers all savings, such as saving for a house, retirement contributions and adding money to an emergency fund. You should have at least three months of emergency on hand in case you lose your job or an unforeseen event occurs. Savings also includes debt payments. Minimum payments are part of the “needs” category, but any additional payments reduce the future interest owed, so they’re considered savings.
How to Use the 50/20/30 Budget Rule to Save Money
1. Analyze Your Spending Habits
First things first, the 50/20/30 rule urges you to analyze your spending habits so you can put more towards your savings. Take a good, hard look at your debit and credit card statements to see if there are any areas you’re overspending on. This may include takeout, clothes, makeup or technology. Figuring out where to effectively cut spending is the first step to saving more money.
2. Weigh Your Wants
Although it may sound exciting to spend 30% of your pay cheque on all fun things, think of it as the maximum amount you should budget for. Before making purchases, think long term and consider if the specific “want” is really worth it. If you find yourself spending more than 30% on your wants, find ways to cut back. Eat meals at home instead of going out, cancel your gym membership and do Youtube workouts, make coffee at home instead of buying it everyday. If you’re spending less than 30% on your wants, you can put more money towards long term financial goals, like your TFSA or RRSP.
3. Focus on an Emergency Fund
Everyone should prioritize creating an emergency fund from their savings first and foremost. As mentioned above, your emergency fund should have at least three months of essential funds in case of job loss, unexpected medical expenses, or other unforeseen costs. If your emergency fund is used, you should focus on replenishing it before moving on to other savings.
4. Factor In Irregular Large Ticket Expenses
At times, there are large ticket expenses you need to plan ahead for, such as putting a down payment on a house. Look ahead at your calendar to see what and when you have bigger expenses coming up so you can plan for them. You’ll likely have to adjust your spending in the time before and after you incur the expense, and planning and preparation will make it easier to handle mentally and financially.
5. Track Your Budgeting With An App
Adjusting your budget can be tricky, especially when you’re first starting out. A budget tracking app, such as Mint will help you stay on track and make it easy for you to see if you’re falling back into overspending habits. Budgeting apps automatically track your purchases and categorize your spending for you. You can view your budget any time to see how much you’ve spent and how much you have left in your budget for the month. Most apps also let you set savings goals, so each time you make a deposit to your savings account, the app will track your progress toward your goal.
If you’ve been having a hard time getting started with budgeting, try the 50/20/30 rule to start saving more money.
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