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Figuring out and sticking to a budget isn’t super fun for most people but it certainly is a smart way to handle your money.
The 50/20/30 rule is one of many budgeting plans that help us get spending under control. This plan works well for households where no more than 50% of the money coming is spent on living expenses. As housing prices rise across the country , this is becoming more difficult for many Americans.
The 50/20/30 budget plan was popularized by Vermont Sen. Elizabeth Warren, a bankruptcy expert and creator of the Consumer Finance Protection Bureau, and her daughter, business executive Amelia Warren Tyagi, in their co-authored book, “All Your Worth : The Ultimate Lifetime Money Plan.”
The book was published in 2006, prior to the Great Recession and the housing bubble burst. Since that time, income inequality has risen, and recent inflation has gotten out of control.
How to Use the 50/20/30 Budget Plan
Using this budget plan isn’t particularly difficult but will require you to assess monthly expenses in comparison with household income. The goal of the 50/20/30 budget is to break down your monthly after-tax income and focus your spending in three broad categories: Essential living (50%), financial goals (20%) and personal spending (30%).
While this budgeting method might have worked for many middle-income families when it was published, the number of households it actually applies to is shrinking. However, if you live in that sweet spot, the 50/20/30 budget can still be a great strategy to implement.
Essential Living: 50%
With the 50/20/30 budget, you should spend 50% of your income on essential living expenses. These can include:
- Rent or mortgage
- Utilities
- Groceries
- Car insurance and/or car payments
- phone and internet
- Gas for your work commute
- Credit card and loan minimum payments
- Other: Bills that are essential and probably no fun at all. Examples include prescription medicine or daycare costs.
Let’s take a closer…
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