50/30/20 Budgeting

The 50/30/20 rule is a simple, practical rule of thumb for individuals who want a budget that's easy and effective.

When you’re making your budget, consider the 50/30/20 rule. Developed by Elizabeth Warren, a senior U.S. Senator from Massachusetts and expert in bankruptcy law, the 50/30/20 rule states that your after-tax income should be roughly divided three ways:

• 50% to needs
• 30% to wants
• 20% to long-term savings

Here's a tool to help you see how much of your monthly income should be used in each category according to the rule:

The beauty of the rule is its simplicity, budgeting can be complicated and stressful, but it’s something you must do your entire life. The 50/30/20 rule can help simplify it.

People define their needs in vastly different ways, but there are several things we can all agree on: housing, food, utilities, and transportation—to name a few.

Housing: Rent, mortgage, homeowners insurance, property taxes

Transportation: Car payment, gas, bus or train passes, parking fees

Insurance: Auto, life, homeowners, health, renters

Utilities: Gas, water, electricity, internet, cell phone

Loan payments: Credit card debt, student loans

Health care: Insurance premiums, deductibles, prescriptions

Note that the necessities come in two flavors: routine expenses and predictable goals. Some things you'll pay for regularly and others require you to think ahead and anticipate future needs.

Wants are things that you enjoy but could live without. They are subjective and personal. The 50/30/20 rule encourages you to be honest about your wants, and give yourself permission to spend some of your money on things that make your life enjoyable.

If you squint, you'll see similarities between your wants and needs. Clothing, for example, is a necessity, but spending extra cash for fancy clothes is definitely more frivolous and probably more like a want than a need. This doesn't mean you can't treat yourself with things that are fun or unnecessary, but you need to be honest with yourself while creating your budget to balance your wants and your needs.

There is no financial habit as important as saving. Unsurprisingly, it's also the hardest. Saving a little each paycheck can make things much easier when unexpected expenses come up. Whether you follow the 50/30/20 rule or not, you should make a goal to save a significant portion of your income for rainy days.

One of the great secrets to saving is finding ways to make it automatic. Don't put yourself in the position of deciding how much to save with each paycheck. Make the savings decision once, save every paycheck, and make it a lifelong habit.

You can make saving more meaningful by giving your savings a purpose. Do you want to help pay for college? Buy a new car? Go on a dream date? Save for that purpose. This will give you a reason to save, rather than just doing it because you feel like you should.

Like all budgeting methods, the 50/30/20 rule is a suggestion, and can be adjusted to fit your situation. Your needs might be zero right now so you can put more of your income toward savings, or maybe you put all your income into savings to get ready for life after you graduate. Just remember to adjust your budget as your situation changes.