It is our belief that the 50 30 20 rule is more geared towards people living in lower-cost of living areas (specifically housing). We think you should be saving as much as possible in dollar terms. So, all other things being equal, is it better to be following the 50/30/20 rule and saving less or not following the rule and saving more? The needs ended up being closer to 70% of our income while our savings was closer to 15%.īut, when we did not follow the “rule” we actually saved more money in absolute terms, although it was not 20% of our income.īasically, we’re saying that this rule might not work in areas where the cost of living is much greater. In one city we saved roughly 20% of our income and our needs/wants were closer to 55/25%, respectively.īut these allocations changed drastically in the next city we lived in. Though they were both large metropolitan areas, our percentages were different. We’ve lived in two different cities (East Coast and West Coast). In our case, there have been times when the rule made sense to follow but at other times not so much. If your needs make up more than 50% of your income, you may not be able to use this rule for your own budget. What are the percentages? Are you below or above for each category? Then add each category up and divided by your after-tax income.
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How to Categorize Your Expenses | Understand Your Spending Habits
If you need some help doing that, check out our post: Saving 20% of your income is a pretty sweet deal.Ī quick way to figure this out is to take all of your transactions for the last month and categorize them as a necessity or a want. If you are able to manage your needs and wants to 50% and 30% of your income then you’re left with 20% savings. But, it can be difficult to change your behaviors like buying a latte every morning. Wants are easier to reduce because they are basic needs like shelter, food, and health. It can be difficult to lower or change these expenses unless you make some drastic changes. The 50 30 20 budget was an idea created by Senator Elizabeth Warren and her daughter, Amelia Warren Tyagi in their co-authored book, All Your Worth: The Ultimate Lifetime Money Plan.Įssentially, the goal of it is to limit your spending in the two categories needs (50%) and wants (30%) which results in you saving 20% of your income.ĭue to housing costs and other high-cost expenses being needs, they take up a bigger portion of your budget. They definitely were not right for us when we lived in San Francisco and rent each month could have bought a used car.Ĭontinue reading and figure out if this budget is right for you. The 50 30 20 budget creates goals but it doesn’t mean that those goals are right for you. Sometimes it feels like what’s the point of creating a budget when you fail to hit your spending and saving targets.īut, a budget is more about thinking about your money than actually hitting those goals. We know how difficult it can be to create a budget and stick to it. Now, that’s the definition of the 50 30 20 budget, but will it work for you? The 50 30 20 budget or rule is recommendation to spend no more than 50% of your after-tax income (referred to just income for the rest of this post) on necessary expenses (housing, food, etc.), no more than 30% of your income on wants (dining out, shopping), and the remaining 20% to be saved. Have you been searching the web for tips on budgeting? You may have come across the 50 30 20 budget or rule (for budgeting).īut, what is the rule and is it right for you?
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