What is the 50/30/20 Rule?
50% Needs, 30% Wants, 20% Savings
The 50/30/20 rule is an easy guide for seeing if your spending is sustainable. It was created by Senator Elizabeth Warren as a guide for working-class families to manage their finances. This will be your quick and dirty guide.
50: Needs
50% of your income should go towards needs. This includes non-negotiable items in your budget like housing, food, and bills. Most people have similar needs, but you will have some needs that are specific to you. Think gym membership, not another peanut butter and chocolate smoothie at the gym.
30: Wants
30% of your income should go towards wants. This is where the joy in life comes in. Eating out, vacations, and cafes. It’s important to be realistic and know that many of us will spend and overspend in these areas, so 30% helps us tame our luxury lions. Not accounting for this is planning to fail.
20: Savings & Investments
20% is for your future self, who will obviously be happy, healthy, and wealthy if you’re reading this. This 20% includes pre-tax contributions to retirement plans. You should really treat this section like essential spending. It’s the ultimate form of self-care.
How to find your numbers:
Gather your pay stubs from last month and find your take home pay + your pre tax retirement contributions. You will then multiply that amount by .5 to get 50%, and then continue to the other two categories.
$2500 (paychecks) + $500 (401k) = $3000
$1500 (Needs) = $3000 x .5
$900 (Wants) = $3000 x .3
$600 (Savings & Investments) = $3000 x .2
That’s $500 (401k) + $100 (paychecks)
Think of these numbers as goals. Maybe you spend closer to $1750 on needs. That’s okay, you can use a budget to recenter your spending (and make room for that yoga retreat you have been eyeing up.)
Tracking Your Spending With a Budget:
Have you heard the saying, “What doesn't get measured doesn't get managed?” That’s something I live by, which is coincidentally why I also love budgeting. It’s important to understand where your real numbers fall in the 50/30/20 framework. Are you closer to 70/20/10?
The first time I did this exercise I realized that too much of my income was going towards needs, and had to seriously think about how to make more money. Tracking your spending is easier than ever with apps like YNAB (You Need a Budget) or Mint. They can connect with your accounts and enter the transactions automatically for you.
One thing I do in YNAB is set my categories to be Needs, Wants, Saving/loans, and true expenses. Then when I run reports in the app it shows me what percentage I am spending in each category.
Remember, this exercise is just a check-in. Don’t feel bad because you aren’t where you want to be yet. This is meant to help you recalibrate and figure out if you need to make more money, or just shift around your spending. Just the fact that you are doing it means you're trying.
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