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The 50-30-20 Budgeting Rule and why it's Important

Written by Jessica Steer
While it is no secret that budgeting is a great way to take control of your finances, it often is difficult to figure out where to start. Many times people focus so hard on putting money away that they forget to do the things they want to do and end up avoiding their budget, not long after they begin. That is why it is recommended that you start budgeting using the 50/30/20 rule. The 50/30/20 rule is a good basis to figure out a budget that provides you with balance while achieving your financial goals.
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    How the 50/30/20 Rule Works

    The basic premise behind the 50/30/20 rule, is that you split your monthly after tax income into three categories. Roughly 50% of your take home pay should go to your needs such as bills, groceries or any other basic necessities. 30% of your income then can be used for your wants and the other 20% can go into a savings account or towards debt. This rule was originally from the book “All Your Worth: The Ultimate Lifetime Money Plan”, which was published in 2005 and written by US Senator Elizabeth Warren and her daughter Amelia Warren Tyagi.


    When you are balancing your wants and needs, it is important to remember what qualifies as what. While streaming services like Netflix and Disney Plus, or your weekly take out night may seem necessary, they are actually considered to be part of the wants category. Rent, mortgage payments, groceries, bills, car payments, extended health insurance payments and minimum debt payments for things like credit card debt and personal loans are in the need category.


    Anything that is not in the needs category should then be considered a want. For some people 30% may be too high in this category while others may consider this to be low. If you are looking for a specific high priced item that you don’t want to use your savings for, then you can save this portion away for that purchase.


    What you use your savings portion for is up to you. You can have an emergency fund, a mutual fund, RRSP retirement contributions or you can use this savings portion for debt repayment. A common problem is trying to pay your debt off too much at one time, the goal then seems unattainable and then it becomes super difficult to stick to a plan. By taking a small portion of your income to slowly pay off debt or accumulate savings, you are going to find there is much more success in small increments.

    Is this Rule Realistic?

    Well, that depends on your financial situation. Once you break it down you are going to realize what is realistic and what isn’t. Sometimes, when you start breaking down your monthly expenses you realize that you are spending money in places that aren't necessary. Other times you may realize that your needs cost way more than 50% of your income. Whatever the situation may be, the idea behind this method is to put the majority of your income to your needs and then allocate specific amounts to your wants and needs. This can help you get a better grasp on your finances and how to sustain them.

    50/30/20 Rule Alternatives

    As mentioned above, what is most important about the 50/30/20 rule, isn’t how much you allocate per each category, it’s about being aware of how much you are allotting per each category. Instead of these percentages, some people choose to use any of the following breakdowns.

    • 40/30/20/10
    • 80/20
    • 60/30/10

    Whatever ratio you intend to use is up to you. Everyone’s financial situation is different, so their financial breakdown should look different. While it is easy to talk about and praise a certain method that may have worked, it is important to acknowledge that the same system might not work for everyone.

    Some people thrive off of a more structured budget like the 40/30/ 20/10, whereas a more laxed budget of 80/20 could be more beneficial for someone else. The important thing in all of these scenarios is that you have control over your money and where it is being spent.


    This rule is very similar to the 50/30/20, it’s just structured differently. If you were wanting a structure like this, 40% of your monthly income would be spent on needs, 30% on wants, 20% on debt or savings and the last 10% on either debt or savings. Whichever you didn’t use for the 20%. This is an ideal structure if you have lower necessary bills and like to have structure in your budget.


    The 80.20 rule is a more relaxed version of the 50/30/20 rule. In this case, 80% of your income is spent, and the other 20% is put into savings or used to pay off debt. While this is a more lenient budget, it still works. Having a less structured idea of bills and wants works better for some.


    This structure is a good way to switch up the 50/30/20 rule if your housing costs are more than 50%. Really, the idea behind this ratio is that it is flexible. No matter what your goals are, once you can break down your expenses you will be able to figure out the best ratio for you.

    The Importance of Budgeting

    No matter how much money you make, budgeting is always a good idea. It is so easy for your money to control you, but having the knowledge of how much you make and what you need to spend can help further your financial future faster than you think. Even something as small as 5% every month can contribute vastly to saving money or paying off debt.

    Saving the money for your goals and paying off debt can both be very daunting tasks. Not being able to pay them off in full can be extremely overwhelming. Taking some small control over your finances and contributing small amounts can get you ahead faster than you think. Simply even just putting $100 away a month you can save $1200 per month.

    The one thing you need to remember about a budget is that it is fluid. If you need to decrease your savings for a while, that's fins. The important thing is not to stop the process. Even just $25 a month while you have it can add to your overall savings until you can increase to $100 again.

    50/30/20 Template

    The easiest way to figure out how much you spend every month is to write down all of your expenses. Create a worksheet where you can break down what you spend per month and keep track of what will be realistic for you.

    The ideal way to do this is to break your budget down into 3 sessions. You ideally should have a new breakdown for every month. Using a template, like the one below, to track your spending habits can make it easier to stick to your budget.

    Just a simple layout that clearly displays the different sections of the budget will clearly show you what your expenses are. By writing down everything you spend once you spend it, you are keeping yourself accountable. You can track your bank account app as well, but writing it down and putting it somewhere noticeable reminds you to track your spending. It doesn’t have to be fancy, just something to help you see where your money is going.


    Budgeting can be a very stressful thing, but it doesn’t have to be difficult. Using a simple method like the 50/30/20 method, can help you structure your money differently. Having a budget isn’t about forfeiting the things you like to do, it’s about taking control and being accountable to yourself. While it may not make sense to get takeout every night, you can budget for once a week. Small changes like that can make a big difference for your personal finance goals and overall financial future.

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