The 50/30/20 Budgeting Rule

Saving money and losing weight have one crucial thing in common: Neither works out if you deny yourself all pleasures. The 50/30/20 rule offers a simple way to budget without having to torment yourself.

Harvard bankruptcy expert Elizabeth Warren – currently running for president of the USA in 2020 and named by Time Magazine as one of the 100 most influential people in the world -coined the 50/30/20 rule of thumb for budgeting. Here’s how it works:

  • Spend no more than 50% of your income on necessities like housing, groceries and bills

  • Set aside 30% for wants like shopping, going out and hobbies

  • Save up 20%

How to get started

Although the idea itself is easy to grasp, its implementation might seem overwhelming at first. Let me introduce you to a simple roadmap for optimizing your budget step by step:

Step 1: Calculate your disposable income

To start with, you need to determine your  income as this is what you base your 50/30/20 calculation on. If you’re an employee receiving a regular income, that should be easy for you to figure out. In case you’re self-employed, it can be a little tricky since your income might vary from month to month. If so, be sure to track your earnings carefully in order for you to be able to determine an accurate average to base your budgeting on.


Step 2: Limit your needs to 50% of your income

Next, list the monthly expenses that you absolutely need to make. How much do you spend on rent, groceries, utilities and health insurance? What else is there that you couldn’t live without? And I’m not talking about your massage appointments here. Only those items that severely impact your quality of life should go into the needs section, like electricity or prescribed medicines for example.

Step 3: Allow yourself to spend 30% on wants

Finally, don’t forget to have some fun! Buy the shirt you’ve been craving, go on a weekend trip or have a big, fat pizza once in a while if that is what makes you happy. However, be careful not to overlook the basic niceties that also fall under wants: your Netfilx account, your organic face moisturizer, your fitness membership etc.

Step 4: Lock away 20% at the beginning of the month

Don’t let your monthly savings sit in your checking account! This is like wanting to lose weight while keeping a stack of your favorite chocolate in your nightstand. The temptation will be just too great at some point during the month. Therefore, it’s best to transfer your savings amount to another account right after you receive your pay.

Saving money isn’t always easy, I know. What helps is a sustainable approach to budgeting that doesn’t force you to let go of everything you enjoy in life. By following the 50/30/20 rule you can still go for what you want, while saving up money for your emergency fund or retirement account at the same time. This way, budgeting becomes a real piece of cake!