What Is the 50/20/30 Rule?

In Senator Elizabeth Warren’s book: “All Your Worth: The Ultimate Lifetime Money Plan” – she broke down a budget into 3 main areas, or categories, and taught that this basic budgeting concept would do well for all Americans. In other words suggesting that living within our means (aka: not spending more than we make) would keep us out of debt and save better for the future.

Your budget figures are based on your After-Tax Income each month. In other words, add up all those paychecks you get in a month and that’s what you get to work with.

Here’s how she broke everything down:

  • 50% for all of your needs. This includes money spent on mortgages, cars, insurance, loan payments, utilities, cell phones and so on.
  • 30% for all of your wants. This is a nearly everything else. While spending in this category I feel could be subjective, but in my mind basically consists of food money, shopping money, gas money and whatever else is extra.
  • 20% for savings. Whether you split it between emergency funds, vacations funds, or investments – doesn’t matter. It’s almost laughable knowing that the average American is saving less than 5% which would make an extra 15% a stretch.

Is the 50/20/30 Rule Realistic?

I’ll admit that when I first heard about this rule, I was skeptical about it. Thinking Senator Warren was being a bit too generalized and giving any weight to the reality of what a budget actually looks like.

Already having a budget in place and knowing where I’m spending my money, I decided to see if my carefully crafted budget could fit within Senator Warren’s parameters of the 50/20/30. Here’s what I found:

  • 52% – My needs
  • 33% – My wants
  • 15% – Savings

I’ll admit that without even trying, my budget was pretty darn close to the 50/30/20 rule. Which basically means that, yes, this budgeting concept is realistic and with some priority adjustments, it wouldn’t be terribly difficult to be exactly 50/30/20.

Here’s the thing though. While I do believe that this is realistic, budgeting can only be successful so long as you track your spending and know 100% where your money is going every month. You have to be able to separate what is considered a “Need” versus a “Want.” And then, make sure you’re not spending more than what’s been allocated for it.

Does the 50/20/30 Rule Include 401K?

Nope! Your 401K is contribution is pre-tax money and typically already taken out of your take-home paycheck each month. Your monthly budget is based on what you bring home each month.

There are many other things that you can put your 20% savings towards. Things like IRAs and Roth IRAs, Stocks, Emergency savings, and so much more. All of that in addition to what is going into your 401K.

While it’s a pain to save now for such things (delayed gratification), your future self and family will very much appreciate your foresight into planning ahead.

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