The federal government has run up a national debt of $24 trillion. So do you really want a United States Senator telling you how to budget your own money?
Apparently, many Americans do.
In 2006, Massachusetts Senator and failed presidential candidate Elizabeth Warren wrote a book called All Your Worth: The Ultimate Lifetime Money Plan. In it, she devised the 50-30-20 Rule:
• Budget 50% for what you need
• Budget 30% for what you want
• Budget 20% for saving money or paying off debts
Whatever you think of Warren’s politics, it’s a solid budgeting concept. And in fairness to Warren, she wrote the book in 2005, when she was a Harvard professor and not yet a politician.
As is often true, sometimes the smartest ideas are the simplest. In the 50-30-20 Rule, simplicity looks like this: First, tally your after-tax income. This is the actual money you earn each month. Take that total and set aside…
50% for what you need
What do you really need to spend money on? Some items are obvious, like your monthly rent or mortgage payment, your electricity or gas bill, and your health and car insurance payments. Then there’s gas and groceries.
However, I’d add to this list those items you could live without, but their absence will cost more in the long run. Your cell phone, for instance.
30% for what you want
This is the fun stuff. You might want to dine at a fancy restaurant, buy sharp new clothes, vacation at a five-star resort. Don’t forget, though, that “wants” include smaller items like getting that cappuccino on your way to work or ice cream for the kids. They also include your streaming services and even your gym membership.
20% for saving money or paying off debts
The average American has more than $6,000 in credit card debt. With interest rates at record highs, it makes sense to get rid of this debt first. If you set aside 20% for this purpose, you’ll soon have a lot of money available that you previously funneled to your credit card company.
Then you can start saving. The number of Americans with emergency funds is dismal, and living paycheck to paycheck can be dangerous – since it’s unlikely you’ll go through your entire life without suffering from a debilitating illness, a natural disaster, a serious accident, or an expensive divorce. How quickly you rebound isn’t just a physical and mental issue. It’s a financial one, too.
Other budgeting rules
The 50-30-20 Rule was so successful, it created an entire category of similar budgeting tactics. None is better than the other, but I’m pleased there’s such a variety of options – because as long as you choose the one that tingles your toes, your bank account will grow.
Let’s quickly review a few of them.
80-20 Budget
The 80-20 Budget Rule is just a stripped-down 50-30-20 Rule. You save 20% of your after-tax income, and you spend the rest on needs and wants. If you really hate budgeting and don’t even want to think about it, then just remember: Don’t spend 20% of your paycheck. Stash it for a rainy day or pay off those credit cards with ridiculously high interest rates.
50-10-20-20 Rule
On the other end of the spectrum, you can get a little more complicated with the 50-10-20-20 Rule. It’s harder to follow, but the results are superior. It starts off the same but adds something at the end:
• 50% for your needs – same as before
• 10% for your wants – yup, half of the 50-30-20 Rule, so not nearly as much fun
• 20% for savings/debts – also the same
• 20% for investing – this is the new one
Honestly, I don’t recommend the 50-10-20-20 Rule. It doesn’t exactly roll off the tongue, but more importantly, I’ve been a CPA and debt counselor for 30 years, and I find most people can’t set aside 20% of their take-home pay for investing. The first priority is paying off debt. If that’s your biggest financial problem, this isn’t the rule for you.
70-20-10 Budget
In fact, if paying off your debts is your top priority, and if you have the willpower to stick to a plan, you might want to try the 70-20-10 Budget:
• 70% monthly expenses – that’s everything you need, plus the wants you can reasonably afford
• 20% saving – this becomes your second-biggest priority
• 10% debt payments – a separate category just for what you owe
The 70-20-10 Budget is good because it splits savings and debt. It’s aggressive because you’re essentially living off of 70% of your paycheck. If you can do it, though, you’ll be in great shape after just one year.
30-30-30-10 Rule
Finally, let’s end with the 30-30-30-10 Rule, which is best for those with huge housing costs. Because rents and home prices are skyrocketing, it’s always a good idea to keep your housing costs front and center. This rule does that:
• 30% housing – this includes not only rent but any renter’s insurance, and mortgage plus property taxes and maintenance costs
• 30% needs
• 30% goals – this means both savings and debt payments
• 10% wants
Believe it or not, there are more breakdowns just like the 50-30-20 Rule. I urge you to choose one or even make up your own. Just don’t do nothing.
Too bad the federal government can’t follow even one of these rules!
