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The 50/20/30 rule

The 50/20/30 rule states that your take-home pay should be divvied up as follows:

  • 50% goes toward essentials like rent or mortgage payments, utilities, healthcare costs, insurance, transportation and minimum debt payments.
  • 20% is allotted for savings. That could mean building an emergency fund, paying down high-interest debt or contributing to an education, retirement or investment account, like an RESP, RRSP or TFSA.
  • 30% pays for your wants. Consider these the items and experiences that don’t contribute to your net worth: entertainment, retail goods, upgrading products out of desire rather than necessity, memberships and subscriptions.

Straightforward as a budget like this seems, it does require discipline to stick to, especially when the lines between categories get blurry.

“I wonder about semantics,” says Stan Tepner, senior wealth advisor at CIBC Wood Gundy. “If I put $1,000 into a TFSA or I pay down my mortgage principal by the same amount from all my monthly payments, is that ‘savings’ or ‘required costs of living’?”

There could also be confusion around what constitutes an “essential” purchase. A gym membership, for example, may receive “essential” designation from someone for whom physical fitness is a requirement at their job. Category-bending like that will be hard to avoid in some cases.

But trying to convince yourself that some of your wants are needs, and slipping more of your discretionary spending into your “essential” category, defeats the purpose of 50/20/30.

In these cases, your wants are really just masquerading as needs, taking up more than their allotted 30%. The money to pay for them has to come from somewhere, and it’ll likely be from the 20% that’s supposed to be meant for savings.

“Having a budget can be a difference-maker, but it’s only a difference-maker if it is used for the purpose that it was created,” says Tepner.

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How realistic is the 50/20/30 rule?

Like any budgeting strategy, 50/20/30 won’t be a fit for everyone. Depending on your financial situation, it might not be realistic at all.

If you’re earning $45,000 in Toronto, for example, you would take home just under $3,000 a month. With the average rent in the city being $2,013, it would be difficult, if not impossible, to allocate only 50% of your net earnings to essentials every month. A similar scenario faces homeowners paying off large mortgages.

What if you’re making even less? Statistics Canada data shows that in 2019, over 13 million Canadians earned less than $35,000 a year. After essentials are paid off, a modest income like that doesn’t leave much for discretionary spending, let alone savings.

Adhering to 50/20/30 may not even be ideal for the wealthy, for whom essentials likely won’t demand 50% of their monthly income. In these cases, putting only 20% of your earnings into savings would be a missed opportunity.

50/20/30 may be best leveraged by middle-class earners who have cash left over at the end of the month — but who need a little help in deciding how best to use it.

No matter which income bracket you fall into, 50/20/30 is a useful starting point for your budgeting needs. If nothing else, it can help you prioritize your spending and clarify which expenses are preventing you from saving more every month.

And really, no one’s going to fault you if 60/10/30 or 70/10/20 is the best you can do. You won’t be letting Elizabeth Warren down. The important thing is that you recognize the importance of a budget, the role it can play in firming up your finances and stick to it the best you can.

“With any budget strategy,” Tepner says, “set it, stick to it, evaluate your results and update it for the next budget period. Rinse and repeat.”

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