Updated: Dec 16, 2020
Learn how to save more, and overspend less.
Raise your hand if you’ve ever downloaded a budgeting app or spreadsheet with the hope to use it, but never have 🙋♀️.
It always starts with great intentions - to finally get your spending under control, but usually what happens is gets abandoned it by the third day, when the realization hits that you forgot to add your fifth Starbucks Coffee of the week.
Over-complicated budgeting tools can really de-motivate people from choosing to budget. Budgeting and managing your finances goes hand in hand, but that doesn’t mean it needs to be complicated, and it definitely shouldn’t take time out of your day.
The simplest budgeting tips are always the best.
The 50/30/20 Rule is a straightforward and easy method for telling you how much to put towards spending, living and saving each month. Using this as a rule of thumb can help create a clear big-picture overview of what your budget looks like for the month.
If you use it consistently it will help you build up your savings, and get rid of debt, without recording every single transaction.
Ready to finally get control of your financial situation? Right this way!
What is the 50 30 20 rule?
The 50 30 20 rule is an easy method to help you manage your money effectively. It’s sustainable and simple. The first step is to divide your after-tax income into the following 3 categories.
50% for you needs
30% for your wants
20% for your savings or paying off debt.
Using this as a rule of thumb, and keeping your expenses balanced across all these categories helps you become wiser about your spending, and will help you avoid overspending unnecessarily.
With only three categories to keep track of, you save yourself time and stress of digging into every detail.
Before you get started
If you’ve ever looked up “how to start budgeting” and “how to save money” then you’ve come to the right place.
Before you can build a proper budget, you need to be aware of your monthly inflows and outflows. Inflows is money that you have coming in (paycheques, multiple income streams). Outflows, are money that’s coming out of your account.
You need to have a system for tracking how inflows/outflows come into your account. The easiest way to do this is make sure you have access to your banking records. We suggest doing this online. Only once you’ve found a system for tracking, can you use the 50 30 20 rule effectively.
Where did the 50 30 20 rule come from?
The 50 30 20 rule originates from the 2005 book, “All Your Worth: The Ultimate Lifetime Money Plan,” written by Elizabeth Warren, Harvard bankruptcy expert and US senator, and her daughter, Amelia Warren Tyagi.
Backed by over 20 years of research, Warren and Tyagi echo our thoughts—to get your finances in check, you don’t need to follow a complicated budget. All you need to do is balance your money across your needs, wants, and savings goals, just by using the 50 30 20 rule.
The 50 30 20 Rule Explained
As mentioned, The 50 30 20 rule breaks down your budget by dividing your after-tax income into just three spending categories—needs, wants, and savings/debt.
When you know exactly how much to spend on each category, it will make it easier to stick to your budget, and helps keep your spending in check. Here’s what your budget looks like when using the 50 30 20 rule
Spend 50% of your money on needs.
Needs are expenses you can’t avoid - Payments for essentials that you can’t live without. 50% of your after-tax income should go towards these necessary costs:
Rent or mortgage
Utilities - Electricity and gas bills
Insurance (for your car, pets, home, etc)
Minimum loan repayments
For example, if your after-tax monthly income is $4000, no more than $2000 should go towards your needs. If your needs are greater than 50% of your after-tax income, then you need to reevaluate you current living situation and make adjustments. Getting a room mate to help split your housing costs, shopping at a discount grocer (NoFrills or FreshCo), and taking public transit instead of driving everywhere are some things that can help reduce your expenses.
Use 30% of your money on wants
After taking 50% of your monthly income and putting it towards helping you exist, 30% can go towards covering non-essential expenses. These are things that you can live without if you had to.
Entertainment subscriptions (Netflix, HBO, Amazon Prime)
Groceries (other than the essentials)
Using the same example as above, if your monthly after-tax income is $4000 you can spend $1200 for your wants. And if you discover that you’re spending too much on your wants, it’s worth thinking about which of those you could cut back on.
Following the 50 30 20 rule doesn’t mean not being able to enjoy your life—it simply means being more responsible with your money by finding areas in your budget where you’re needlessly overspending. If you’re confused about whether something is a need or a want, simply ask yourself, “Could I live without this?” If yes, that’s a want, not a need.
The first step to limiting your wants is to cancel any subscription based expenses you don't regularly use or forgot you still pay for, for example, LinkedIn Premium, Spotify Premium, and Netflix subscriptions.
Limiting your wants can be extremely difficult, but self-discipline is what is going to make or break your financial wealth, both in the short and long term.
Stash 20% of your money for savings
Now that 50% of your income is going towards your needs and 30% towards making life fun, the remaining 20% can go towards your savings goals and paying back any outstanding debt obligations.
Minimum repayments are considered a need, so that you don’t go into further debt if you currently carry any debt. Extra repayments, reducing your existing debt and future interest are considered savings. Consistently putting 20% of your money each month helps you build an emergency fund. An emergency fund should consist of 6 months of your living expenses tucked away for a rainy day. If you earn $4000 after tax per month, you can put $800 into your savings every month. That’s $9600 saved over 1 year.
Step-By-Step Guide on How to Use the 50 30 20 Rule
So now that you know what the categories are and what falls into them, you’ll need to calculate your income and categorize your spending.
1. Calculate your After-Tax Income
If you work full-time, this is fairly easy to do. You can easily find what you earn each month by looking at your paystubs and what the after-tax amount is. If your employer directly deposits money into your account, you can calculate your inflows by checking your bank accounts directly.
If you’re a freelancer, this is a bit more difficult. Your after-tax income is what you earn per month, minus your business expenses.
If you work on commission, and your paycheques range month to month, look at the past 3 months and use that as an average. Be aware of seasonal differences as well.
2. Categorize your spending for the past month
Remember that quick section above about having access to your banking online. This is where it comes in. Take a copy of your past bank statement (for the last 30 days) and sort your expenses into 3 categories, needs, wants and savings. Remember, a need is an essential expense that you can’t live without. A want is a luxury that you can avoid, but makes life fun. Savings, are additional debt repayments or contributions to your pension fund, or emergency fund.
3. Evaluate your spending. Adjust to match the 50 30 20 rule
Now that you have your expenses laid out, you can see how much goes towards what category and you can start consistently saving. Starting this month, use the buckets to limit spending.
Since your needs and savings are fairly stagnant month to monthly, the first place to start after you’ve evaluated is to set up auto-deposits to your savings, investment, or debt repayment accounts.
This means that 20% of your after-tax income gets moved into your savings account automatically, BEFORE you have time to spend it on anything else. Then you use the remaining 80% for needs and wants.
This step is critical, and having self discipline here is the only way you’ll see financial success.