You don’t have to come up with an itemized, colour-coded spreadsheet that tracks every dollar if that’s not your thing. You should have some way to monitor where your money is going though, especially if you’re finding it tough to make your bills and yet you always seem to have enough for that extra-large latte in the morning.
Before you will us to pry your latte from your hands, know that we’re not suggesting you give it up. With the 50/30/20 budget, you simply have to decide whether it’s a need or a want (hint: it’s probably a want).
A 50/30/20 budget divvies up your income so you’re spending 50% on your needs, 30% on your wants and 20% on what you’d like to save for. This method was developed by U.S. Senator Elizabeth Warren, back when she taught bankruptcy law at Harvard, and her business executive daughter, Amelia Warren Tyagi.
Here’s how you can put it into action.
1. Figure out your total income.
This is all the money that your household brings in every month, after taxes. It might include income from your workplace or self-employed job, your partner’s income, or any other regular income that you count on.
2. Use 50% for your needs.
These are the things you can’t live without. Mortgage or rent, groceries, water and hydro bills, insurance, essential clothing—the key here is essential. Minimum debt payments fall into this category, too.
3. Use 30% for your wants.
“I can’t live without cable.”
“Takeout is food, so it’s a necessity.”
“Sure, this jacket is made by a high-end designer, but it’s a jacket. Clothing is a need."
There’s a fine line between needs and wants, and it’s not hard to push that line in your favour. It’s important to consider what’s actually a want, like entertainment (ahem, cable and Netflix), restaurants (takeout and morning lattes included) and luxury items (yes, the jacket counts).
That’s not to say you can’t enjoy these things, just try to keep the money you spend on them to 30% of your budget.
4. Put 20% towards savings.
We’re not talking saving for a trip to Hawaii (that falls under wants). We’re talking savings that will put you in a better spot financially.
If you don’t already have an emergency fund, now’s the time to start funneling that 20% towards one. You’ll want to have enough to cover three to six months of expenses and keep your money accessible (like in a high-interest savings account) should you ever need it.
That 20% can also help you chip away at your debt, particularly the credit card kind. While your minimum debt payments are covered in the needs category, your savings can reduce your debt even more.
Retirement is another thing to save for, even if it seems far away. The more you save now, the more your money will grow over time. You’ll thank yourself later, as the retirement years approach.
Lastly, think of investing your savings rather than spending them on your wants. There are short- and long-term investment options that might be right for you, depending on your financial goals.
The best part about the 50/30/20 budget is its flexibility. It’s not a rigid, down-to-the-last-dime budget at all. It’s a guideline, not a rule. If you find your needs require a little more, that’s fine—just spend a little less on your wants. The same goes if you have lots of debt. You don’t have to give up your wants completely, but unfortunately they have to remain low on the priority list if you’re aiming to get in good financial shape.
When it comes to savings, there’s really no limit. Save away, if you can, but aim for that 20% as a minimum.
A financial advisor can give you some guidance on spending, saving and getting out of debt, no matter how much money you make. There are advisors who specialize in credit counselling too, if debt is the main hurdle you’re trying to overcome. It’s free to connect with an advisor who meets your needs through Vexxit, so reach out and create the financial future you want to have.