50/30/20 Budget Rule: A Simple Budgeting Method

Starting a budget for the first time can be overwhelming. Between tracking your income, juggling bills, and figuring out what you can actually spend, it’s a lot to take in.

One easy way to get started is with a percentage-based budget like the 50/30/20 rule. It breaks your after-tax income into clear, manageable categories that help you cover your essentials, make progress on your financial goals, and still leave a little room for fun.

If you are someone who isn’t a fan of traditional budgeting, then this simple budgeting method might be just what you need.

What is the 50/30/20 Rule?

The 50/30/20 rule is an easy, flexible way to manage your money. This method divides your spending of your after-tax income, not your gross income, into three categories:

• 50% goes to needs
• 30% goes to wants
• 20% goes to savings

It was popularized by U.S. bankruptcy expert Senator Elizabeth Warren in her book, “All Your Worth: The Ultimate Lifetime Money Plan.”

50% for Needs

Needs are the things you can’t really live without. We’re talking about the bills and essentials that keep your life running. Ideally, you should be able to cover all your needs using about 50% of your after-tax income.

Here are a few common examples of needs:

• Groceries
• Utilities
• Health care
• Rent or mortgage payments
• Insurance payments
• Car payments and gas
• Minimum credit card payments
• Student loan payments

Your needs and how much they cost can change over time. Say you finally pay off your student loan. That frees up some room in your budget, and you can put that money toward other essentials, like your car payments or mortgage, helping you pay them off faster.

Also, keep in mind that many expenses are a mix of both needs and wants, like a cell phone or Internet. If something falls into more than one category, just split the cost between them.

30% for Wants

Wants should take up about 30% of your after-tax income. These are the things you enjoy but don’t need to survive. Think of it like choosing a gym membership over free home workouts, or dining out instead of cooking at home.

Wants are the little (or big) splurges that make life more enjoyable. Some examples include:

• Dining out/take out
• Tickets to sporting events
• Gym memberships
• Subscriptions to streaming services
• Going to the movies
• Spa treatments
• Unnecessary upgrades for phones or electronics
• Unnecessary clothing or accessory purchases

Your wants can also change over time. Once you’ve checked one off your list, go ahead and add a new one. It’s a good way to stay motivated and keep moving forward.

20% for Savings/Debt Repayment

The last 20% of your after-tax income should go toward savings. This is the part you set aside for those bigger, long-term goals, such as:

• Having an emergency fund
• Saving up a down payment for a house
• Saving up for a vacation
• Saving for your child’s education (RESP)Saving for retirement (RRSP)
• Paying down your debt faster

If you pay off a debt, it may be tempting to allocate that extra money towards your wants, but try to keep it under your savings by investing it into a tax-free savings account or retirement account.

Why the 50/30/20 Rule Works

The beauty of the 50/30/20 rule is that it keeps budgeting simple. Instead of tracking every dollar, it gives you an easy-to-follow structure:

• 50% of your monthly income goes to essentials
• 30% to things you enjoy
• 20% to savings and financial goals

It’s especially helpful for beginners who might feel overwhelmed by more complex budgeting methods.

Plus, it’s flexible enough to adjust as your income or expenses change. While you don’t have to stick to those exact percentages (because real life isn’t always that neat), they are a great starting point to help guide your spending and keep things balanced.

Whether you’re trying to get out of debt, save for a big purchase, or just gain more control over your finances, the 50/30/20 rule offers a clear starting point that’s easy to stick with.

How to Apply the 50/30/20 Rule

The 50/30/20 budget is a simple and flexible way to organize your money. If you are ready to give it a try, start by taking a good look at your finances and setting some goals, then follow these steps:

1. Figure Out Your After-Tax/Net Income

Your net income is what you actually take home after things like taxes, CPP, and EI are taken off your paycheque. You can usually find this number on your pay stub. If your employer also takes off retirement contributions, you can count those toward your savings category.

If you are self-employed, it’s a bit different. Your after-tax income is what’s left after you subtract your business expenses and set aside money for income taxes.

2. Keep Your Essential Expenses Within 50%

First, try to trim your expenses so your needs are no more than 50% of your monthly (after-tax) income. That includes essential items like rent, utilities, groceries, and loan payments. You might find it difficult at first when separating needs from wants, but the key is to be strict about it. Needs are the things you truly can’t live without.

3. Limit Your Wants to 30%

Next, figure out where you can cut back on your wants. These are things you enjoy but don’t really need, like takeout, streaming subscriptions, or that extra pair of shoes.

Remember, cutting back doesn’t mean giving up everything fun. It just means being more mindful about your spending habits. Small adjustments can free up extra money for savings or debt, without making you feel like you’re missing out.

4. Use the Remaining 20% for Savings and Debt Repayment

Put the rest toward savings and tackling debt. Since your minimum debt payments are already covered under “needs,” start by building up an emergency fund. Aim to put away enough to cover three to six months of expenses, just in case something unexpected happens.

Once that’s set, start tackling your debt, especially high-interest ones like credit cards or personal loans. Then, when those are paid off, keep that 20% working for you by saving or investing it, no matter how tempting it is to spend it.

5. Stay Consistent

Remember, a budget only works if you follow through, so it’s important to be consistent with it. Life will throw surprises your way, but try to keep following the plan as best you can.

Also, make sure to review your budget regularly, make small adjustments when needed, and stay focused on your goals. This will help you build long-lasting financial habits.

Example of the 50/30/20 Budget Rule

Statistics Canada says the average annual income for individual Canadians was $59,400 in 2023. If we divide that by 12 months, we get $4,950.

So, let’s round that up and say you earn $5,000 each month. According to the 50/30/20 rule, your spending limits would be:

• $2,500 on your needs
• $1,500 on your wants
• $1,000 to pay down debt or save

Whether you are just starting out or an unexpected expense has come up, if you find your needs take up more than 50% of your income, don’t let it stress you out. You can temporarily borrow from your wants category to cover the gap. Life happens, and sometimes expenses are higher than we’d like.

Just try not to rely on this long-term. The goal is to gradually bring your needs back in line with that 50% target. That might mean getting cheaper internet, price matching when grocery shopping, moving to a more affordable apartment, or maybe even car pooling to work.