What is the 50/30/20 Rule and How Can You Apply It to Your Finances?

Balancing a personal budget is often easier said than done, especially when it comes to living in a city like Toronto, where the cost of living continues to rise. Budgeting can feel intimidating. How do you know where to save your money and where you can afford to splurge? How do you balance enjoying life in the city without sacrificing important opportunities to save and invest your income?

In the past few years, a new budgeting principle has become the go-to for straightforward money management: the 50/30/20 rule. This principle was designed by Senator Elizabeth Warren from the United States and has translated across countries for its efficiency and simple instructions. Even the most basic budgeter can apply this principle to their daily life.
When it comes to applying the 50/30/20 rule, it’s important to break down each section so you have a clear idea of how you can incorporate this principle into your unique financial situation.

Step One: Budgeting 50% for Necessities

The first category is the largest, and for a good reason — it involves setting aside half of your monthly income to pay for the necessities you’ve acquired. Necessities are expenses that cannot be left behind and are required to maintain a healthy and safe lifestyle, including rent or mortgage payments, insurance, healthcare-related costs. It also includes any minimum debt payments that were previously being paid for using fast and simple online loans in Canada.

While it could be considered a variable expense, your utilities will also factor into this percentage. However, if you’re able to apply any cost-cutting measures, including taking shorter showers and unplugging unused electronics, these costs can vary month-to-month.

Step Two: Budgeting 30% for Your Wants

While saving and investing is essential to prosper financially over time, it’s also important to remember that you work hard to earn the money you bring in and deserve to enjoy yourself within reason. Setting aside 30 percent of your income gives you some freedom to enjoy life in Toronto without guilt. While that doesn’t necessarily mean splurging on the latest smartphone or designer handbag, it can involve more meaningful purchases such as dinners out with friends or purchasing a ticket to see an exciting live performance in the city.

Step Three: 20% Into Savings

The last part of the 50/30/20 rule applies to your savings. Before you allocate the entire 20 percent into a savings account, you may want to consider paying off any high-interest debts such as credit card balances, which will only increase if you cannot make more than your monthly payments.

If you’re lucky enough to be debt-free, you can set aside this portion of your budget into a savings account — it’s recommended setting up an emergency fund, which is designed to provide a financial cushion should you incur any urgent costs, including medical bills or car trouble. The goal of any savings fund is to have approximately three-to-six months of expenses set aside.

Once your emergency fund is established, you can use this 20 percent in the coming months as investment opportunities, which allows you to grow your net worth long-term.

You might be interested in reading, “Get Rich, Lucky Bitch!” by Denise Duffield-Thomas: Review.