Budgeting Series: The 50/20/30 Rule

The 50/20/30 rule is a budgeting tool developed by Senator Elizabeth Warren that gained popularity in 2012 for its simplicity and practicality. In a nutshell, budgeting is the allocation of after-tax income into various categories to ensure the correct distribution of income. The more comprehensive the budget, the more categories. Budgeting is used by governments, corporations, and individuals. However, the 50/30/20 rule applies specifically to people, and won’t be comprehensive enough for most business models. 

The 20: Savings

20% of after-tax income should go towards savings. This category seems self-explanatory, but is a little tricky. The money should go towards creating an emergency savings fund, investing in the stock market, and saving for retirement. Additionally, debt repayment beyond the fixed minimum payments fall into this category.

The 50: Needs

50% of after-tax income should go towards needs. Needs include fixed costs like rent, mortgage, utility, and insurance payments. While groceries do fall under this category, eating out and ordering food does not. This is because while food is necessary to live, eating out costs more than buying groceries and cooking does.

The 30: Wants

30% of after-tax income should go towards wants. This includes eating out, entertainment subscriptions, shopping, and more. In essence, anything that isn’t necessary falls into this category.