The 50-30-20 Budgeting Rule

Somebody once said that “every successful person has a plan” and for those wanting to save for a down payment towards their next home should most definitely should have a plan. In this article we will outline some of key points of the 50-30-20 budget rule, an easy to follow guideline for those wanting to build that down payment amount or those wanting to have a simplified plan for their monthly family budget. .

The 50-30-20 budget rule was featured in a book titled, All Your Worth – The Ultimate Lifetime Money Plan. This book is authored by United States Senator Elizabeth Warren and outlines an relatively easy formula to follow. This formula looks at your personal or family net income and then breaking it down into three categories:

Needs: apply 50% towards your “must have” necessities such as shelter and food expenses

Wants: budget 30% for your items such as entertainment, new electronics and similar

Savings: secure 20% of your monthly net income in the form of true savings

I recently had the chance to work with an individual, who like many Canadians said that he is “living paycheque to paycheque” and in many months is actually spending more than his earned net income. Upon a quick review it was easy to identify the expenditures over and above his net income were being carried by his credit card and a low interest line of credit that was easily accessible. As nice as it is to draw from your line of credit, it also has the chance to create a bad habit as you know it’s always there when needed. However, if you are not following a budget outline and reviewing regularly, then you may just fall into a paying interest only payments trap and it just ends up delaying your personal goals like purchasing your next family home sooner than later. For this individual, here’s what I found at first glance:

• Net monthly income was $5000 month

• Savings were at a negative as no money was saved in the last 6 months

• The wants purchase percentage was fairly high

• For needs, he was over spending on monthly groceries

Based on the 50-30-20 rule, we had the client focus on:

• $2500 target for monthly needs

• $1500 target for monthly wants

• $1000 savings target every month

When the client came back to me with a detailed review of their recent month(s) expenses, we saw the following average spends per month:

• $3200 towards needs representing 64% of net income

• $2000 towards want items which made up 40% of net income

• Zero savings

We were quickly able to turnaround their current 64-40-0 expense plan into a 50-30-20 budgeting plan by:

• Reducing grocery spend per month. The client was spending around $1800/m on groceries and buying food items that were splurges and buying case lots that they did not need for the immediate future. They were buying items as they were “on sale” and felt like they were saving. By focussing on a new budget number of $1200 per month for groceries, the client now had a target spend of $300 weekly on groceries to follow. This will save this family $600 monthly going forward without sacrificing on quality food items. As well, we agreed that some of the clothing items that are necessary were actually need items that they can do without. Yes, they needed that winter jacket but a $250 one would have just been fine instead of that $500 name brand!

• Reduced unplanned spending by $500 month. This client was spending at least 10% higher for items that fit into the wants category. We could see multiple purchases and impulse buys taking place online especially with Amazon. These online sites are making ordering a little too easy these days by suggesting similar products and the client found himself seeking unique items not found in local stores. When we asked the client if he really needed the items, he replied with a big “NO” as they were all vanity items that a typical individual can do without. By getting the client to ask himself a simple question before each purchase - do I really need this? We now have the client on track to save an additional $6000 annually.

As you can see in the budgeting examples above, the client will save a minimum of $1100 plus every month as he is now focussed and has created self discipline. This will be equating to over $13k in annual savings and put the client on track to building up towards their next home down payment or if things change, having real savings in his account without dipping into that attractive line of credit.

I hope you have enjoyed this overview and I invite you to connect with me at anytime to discuss best practices or additional tips to help you qualify for your next mortgage. In the meantime, go ahead and take the 50-30-20 budget challenge and see if you can unlock some money!


All the best,

Sukh Sangha