The 50-30-20 budget plan is often touted by Harvard’s Elizabeth Warren . Now you just know this budget is good if a Harvard professor likes it!
The 50-30-20 Budget Explained
We’re going to keep this super simple. In all honesty, you really can’t mess this budget up. The 50-30-20 budgeting system is based on the idea that you should:
- Spend no more than 50% of your monthly, after-tax income on needs. This includes your home, car (be reasonable), insurance, etc. Things that you really need to survive.
- Spend less than 30% of your monthly, after-tax income on wants. Wants is a broad category that includes everything from a brand new cell phone with a fat monthly bill to the vacation of your dreams. This is the most fun part of the budget!
- Save 20% of your income for short-term savings, an emergency fund, as well as your retirement accounts. This column should also be used to start paying down debt, if you have any to pay down. Notice how the 50-30-20 budget and the reverse budgeting system both agree that 20% of your income should be saved.
50-30-20 Plan Caveats
There are some caveats to this system, most notably that you can easily justify some serious spending in the “needs” category. A phone line is very easily a need, but a 5000 minute plan with unlimited internet access might not be. A nice apartment in a good area is a need, but you certainly don’t need 2,000 square feet when 1,000 will do.
In short, you still have to be attentive. Most people will find that implementing this budget is a really quick way to find out what’s bringing down their personal finances. Cars are needs; $600 car payments are not, etc.
So, as you approach this budget system, you still have to be smart about what is actually a need and what is not a need.
Some Benefits to 50-30-20 Budgets
One of the best things about a 50-30-20 budget is that it requires that your necessities are less than half your after-tax income. This is especially good for dual-income households, where each adult earns roughly the same amount per year.
If you were to experience a short-term lay off, then you can see why spending 50% of your income on the necessities provides a real benefit. You can survive indefinitely just by cutting back on the wants and savings column until you find another job. This greatly reduces your “burn rate” of savings in the event it takes several months to find a new job.