The book, "All Your Worth – The Ultimate Lifetime Money Plan" explains the 50/30/20 budget rule. Mother-daughter duo Elizabeth Warrant and Amelia Warren Tyagi created the plan. If you have watched shows on television about tiny houses or minimalist living, you have a reasonable idea of how the 50/30/20 budget rule works. The goal is to encourage you to live minimally and well within your means.
The rule encourages this by breaking your spending down into three essential categories:
- Needs - What you have to have.
- Wants - What you desire to have.
- Savings – Debt repayments may be included in this section of the budget as well.
The idea is that by creating balance in the way you spend, you have the means to pay for the things you need, set aside money for the future, and have some left over for a little fun along the way.
The earlier in life you adopt these habits for spending responsibly, the more significant the effect they will have on your long-term financial outlook. Here’s how it breaks down.
50% of Your Income
With this rule of budgeting, 50 percent of your income must be used to cover the things you absolutely must have to survive. These are the bills you must pay no matter where you live. They include:
Of course, some of these items, such as food, can fall into two categories. You must eat to survive. However, you don’t have to have gourmet meals or expensive restaurant experiences to do so.
The same holds true for your vehicle. It may be a need to have one, but it is a want that drives you to choose a luxury model with heated leather seats and all the bells and whistles.
Another key to remember when planning your budget using the 50/30/20 philosophy is that the breakdown of the essentials doesn’t have to be straight down the middle.
For instance, you may elect to live in an area that has higher rent but opt for public transportation instead of owning a vehicle. It’s a trade-off. As long as the total accounts for no more than 50 percent of your income, you are living according to plan.
30% of Your Income
That is the broadest section for most people as it encompasses the whole world of wants. It can include anything from special meals out on the town, movie night with your family, vacation spending, and even upgrades you make to your home or vehicles.
These are all optional expenses. They aren’t necessary for you to live. Even to live comfortably. But they do help to make your life more comfortable and enjoyable. Acceptable spending in this category includes things like:
- Cable bills
- Cell phone plans
- Movie tickets
- Special occasions
- Holiday spending
- Coffee excursions
- Gym memberships
- Weekend trips
- Even charitable giving
The spending in this category is also the most fluid and flexible. It allows you to enjoy the occasional indulgence without wrecking your budget in the process.
In fact, this is the category that allows this budget plan to work so well for many people who are unable to (or unwilling to) stick to a budget that offers far stricter limitations on their spending.
20% of Your Income
Under this budget rule, you must set aside 20 percent of your income for one or two purposes. You must save that money (investing it for retirement constitutes saving under this plan), or you must use the funds in activities to reduce your debt – like paying off credit cards.
While the 20 percent part of this rule is listed last, many would argue that it is far more essential than the 30 percent rule and is a higher priority than spending on the wants you have for the month.
Others would argue that providing for those wants is what makes this plan work as long as you are hitting close to your goal of 20 percent savings each month.
Why does this plan work for so many people?
One of the biggest reasons is the flexibility it offers. Another benefit of this budget system is that it forces people to look at the way they spend money and to reassess their priorities. It's easier to figure out the things that matter most when you're forced to choose between splurges and urges to stay within your budget. Finally, it offers a balance between want and need that allows you to feel fulfilled while working toward your goals.