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What is the 50/30/20 budgeting rule?

5 min read

What is the 50/30/20 budgeting rule?

Written By

Eddy Sutton

Rounding it up

  • The 50/30/20 budgeting rule by US Senator Elizabeth Warren divides your after-tax income into three categories: 50% for needs, 30% for wants, and 20% for savings.

  • Your “needs” include obligatory expenses like rent or mortgage payments. Your “wants” are your basic pleasures of life. You should allocate the last 20% towards setting up an emergency fund, or paying down any high-interest debt.

  • To begin with the 50/30/20 budget, calculate your after-tax income on average. Then take a look at your spending habits to categorize your expenditures. Next, identify easy, low-hanging opportunities to save.

  • Remember that the 50/30/20 number is a guideline, and you can (and should) tweak them according to your own financial goals.

Do you struggle with setting up and keeping a personal budget? Maybe you can’t resist a trip to the Apple store after a new iPhone is released. Or maybe you find it hard to cook when UberEats sends you a “new promotion” on delivery.

Well, lucky for you there is a new trend in personal finance that can help: The 50/30/20 budgeting rule! The 50/30/20 budgeting rule is great for beginners and money savvy individuals alike looking to stay on top of their personal finances. Interested? Keep reading.

What is the 50/30/20 budgeting rule?

United States Senator Elizabeth Warren popularized the "50/30/20 budgeting rule" in her book, All Your Worth: The Ultimate Lifetime Money Plan. Basically, the idea is to divide up your after-tax income and allocate it to 3 general categories:

  • 50% for needs

  • 30% for wants

  • 20% for savings

These percentages are a guideline, and you can (and should) tweak them according to your own financial goals. The key takeaway is to better understand where your money should be going versus where it’s actually going.

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Budget 50% for needs

This is obviously the largest category, and as such, encompasses everything you need to survive. This includes expenses like rent or mortgage payments, car payments, insurance, health care, and minimum debt payment (i.e. your credit card bill). This also includes variable costs like your pay-per-usage utilities (i.e. hydro and gas) and your groceries, which can be hard to be consistent with. Keep in mind that every individual is different, so you may have an expense that you categorize as an essential monthly cost which isn’t mentioned above.

Ideally, half of your after-tax income should be all you need to cover your necessities. If your expenses are larger than your income, you will either have to cut down on "wants" or try to downsize your lifestyle. The latter is easier said than done, but here are a few things you can try:

  • Using public transportation or carpooling instead of Ubers or driving your car

  • Switch your insurance to a pay-per-usage policy

  • Inquire with your utilities service provider about setting up equal payments

  • Downgrade your phone or cable plans if possible

"These percentages are a guideline, and you can (and should) tweak them according to your own financial goals."

Budget 30% for wants

Don’t forget, this is your hard-earned money, and some of it should definitely be earmarked for fun. That being said, your "wants" don't include extravagances, like the latest iPhone or a designer handbag. They include the basic pleasures of life that you enjoy, like going out with friends, ordering in, etc.

It’s not recommended that you purely spend 30% of your after-tax income every paycheque on fun, but rather, that is the maximum amount you should budget for. The goal of creating and following a budget is still to come under the amounts set for each category.

For example, if you are a gamer and you have a bit of wiggle room in your “wants” category doesn’t mean you should go out and spend it on the latest game. Try resisting the desire to be the first one with the game, and pick it up at a discounted price later. That way, you can put any extra savings towards bigger purchases or your long-term financial goals (like a TFSA or RRSP).

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Budget 20% for savings

Did you know that in 2018, the average net saving for all Canadian households was $852 and that for each $1 earned, households owed $1.82 in outstanding debt? That’s astounding, and a little backwards if you think about it!

The first thing you should do with this 20% of your after-tax income is pay down any high-interest debt (credit card debt, medical debt, student loans, etc.) If you don’t have any debt, or you’ve successfully paid it off, then put this money towards setting up an emergency or slush fund.

Life is messy and sudden expenses, like car repairs or vet bills, can mess up your budget. Preparing for every financial scenario is impossible and exhausting, so don’t do it. Just work to build a nest egg, so that you’re prepared for the unexpected.

Your slush fund should be the equivalent of about 3 months of your “needs” category. Why? Imagine the worst case scenario: losing your job and income altogether. You will need time to sign up for EI, brush up your resume and start job hunting. You don’t know how long exactly you will be out of work so it’s best to give yourself more time and one less thing to worry about.

Once you’ve built up your emergency fund, you can start putting some money to work in a low-risk investment savings account (i.e. RRSP or TFSA).

"It’s not recommended that you purely spend 30% of your after-tax income every paycheque on fun, but rather, that is the maximum amount you should budget for."

So where do you start?

To begin with the 50/30/20 budget, calculate your after-tax income on average. You can do exact amounts or round down to the nearest dollar. Once you have that number, split it into the allotted percentages to get each category’s maximum budget.

Then take a look at your spending habits over the past couple of months and start identifying which segment those particular expenses fit into. Be mindful that this is a guideline and not an absolute. For each expense, ask yourself, “Was it a need or a want?” and come up with subcategories they can live under for your budget. It’s also recommended that you round up your utility expenses to the nearest $5 to anticipate heavier usage months.

Once that’s complete, how do your expenses measure up to each category? Are there any expenses that you can potentially recategorize, or should you tweak the percentages to better suit your situation?

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Next, identify easy, low-hanging opportunities to save. For example, do you have too many streaming services? Can you share accounts with your roommates and split them 50/50?

Once you think you’re set, test-drive your new budget for 2-4 weeks to see if it’s liveable. If a budget is not liveable, you won’t stick to it, so it’s crucial you find a balance that will work for you beyond the short-term.

If you need a place to start, we launched a budgeting feature that’s super simple to use within your KOHO app. Or if you’re just curious about how applying this rule to your personal finances would look like, we have a handy budget template you can use today!

Let’s get budgeting

The 50/30/20 budgeting rule is an easy way to start your journey towards financial balance. As your financial situation evolves, revisit your budget periodically to ensure it works for you through every stage of your journey.

Life is messy and you can’t prepare for everything but even a little bit of financial planning can go a long way. Between the 50/30/20 budgeting rule, and all the spending insights within your KOHO app, you’re already a few steps ahead!

Note: KOHO product information and/or features may have been updated since this blog post was published. Please refer to our KOHO Plans page for our most up to date account information!


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