50/30/20 Rule of Thumb for Budgeting (1)
As I mentioned in Part 1, many people will abandon a budget if it is too complex or requires more bookkeeping and analysis time than they can (or are willing to) spend. The 50/30/20 Budgeting Plan is probably the easiest to create and maintain. It is also flexible so you can update for changes in your income, changes in expenses or to update your budget to better serve your needs for a budget.
Before starting to create you budget, you’ll need to accurately calculate your monthly bring-home income. This is your gross income less all federal, state and local taxes and Social Security + Medicare withholding. Your personalized budget will be based on your family’s bring-home income income.
The 50/30/20 is as simple as it gets because there are only three top-level spending categories:
50% – Household needs
- Transportation (including car payment)
While 50% of your bring-home income sounds like a lot of money, this category includes some major expenses for most families.
30% – Wants
- Dining out
This generous amount will keep you from feeling deprived and abandoning your budget.
20% – Savings and Debt repayment
- 10% minimum towards savings (emergency fund, education, retirement, etc.)
- 10% towards paying off your unsecured loans. (Examples: credit cards, student loans, etc.)
Always pay yourself first before paying all other bills.
Note: The 50/30/20 Budgeting Plan is not the budgeting plan I used to get me, at the age of 40, on the road to financial freedom and security. My plan had five categories that separated out saving and housing (mortgage). Hence, the percentages are different. Other than that, the concept and simplicity are the same.
(1) Harvard bankruptcy expert Elizabeth Warren—U.S. Senator from Massachusetts and named by Time magazine as one of the 100 Most Influential People in the World in 2010—coined the “50/30/20 rule” for spending and saving with her daughter, Amelia Warren Tyagi. They co-authored a book in 2005, All Your Worth: The Ultimate Lifetime Money Plan.