“What if I wasn’t so good at following rules growing up? Is this one that I need to stick to?”
Don’t worry, you won’t get in trouble for breaking this rule. For that matter, this “rule” is more a guideline that you’ll actually want to follow.
The 50/30/20 rule, coined by Sen. Elizabeth Warren, is an outline for balancing the wants and needs in your budget. Using your after-tax income (after any 401(k) or IRA contributions), aim for these spending proportions:
50% of your budget should go to your needs: your rent and utilities, car payments, your grocery essentials (we’re thinking milk and eggs, not truffle oil), minimum credit card or loan payments, and other regular fixed costs.
30% of your budget goes towards your wants: your flexible costs like dining out, concerts, weekend trips, gas, or birthday and holiday gifts. These costs can vary month-to-month, but are also where you can most likely trim your budget if times get lean.
20% of your budget should go to savings and debt outside of your minimum payments: doubling up on student loan and credit card payments, padding your emergency fund, or contributing to your Roth IRA.
We know what you’re thinking: if paying down debt is so important, shouldn’t I use 30% of my after-tax income to pay down debt instead of 20%? It boils down to psychology here: are you more likely to binge on your favorite snack if you haven’t indulged in it for six months? If you ever had to dump half a package of red velvet Oreos in the trash to stop yourself from eating the entire bag, you have your answer.
With a 50/30/20 balance, you’re less likely to do the financial equivalent of raiding the cookie jar because you “deserve” it. There’s a reason financial professionals recommend this budget: 50/30/20 is realistic and keeps you (and your budget) balanced without making you feel totally strapped.
Illustrations: Olya Kirilyuk