How Can You Develop the 50/20/30 Rule into an Action Plan?
by Alacias Enger
Longtime A&U reader Robert relied on Social Security Disability benefits for the majority of his income from 1999–2017, which was supplemented by periodic payments for contract work. Living below the federally recognized “poverty level” for more than twenty years, it’s always been difficult for Robert to save money. In 2010, the tragic passing of his father left him an inheritance. Since then, Robert and his partner have been protective of these funds, placing them in an FDIC insured savings account, as this emergency savings is their only asset.
Recently, Robert’s partner has faced several months without employment, forcing the couple to dip into their emergency stash in order to pay for rent and other necessities for a couple of months. Currently, $15,000 remains of the original inheritance. These funds were a godsend in their time of need, which is the purpose of an emergency savings. Their savings kept them safe when they might not be otherwise. Robert’s partner has since reestablished employment, and Robert has successfully transitioned to regular Social Security payments in addition to his contract work. Now that they’ve been able to reestablish their income sources, they have been working diligently to rebuild their depleted savings account.
Saving money is easier said than done, particularly when you’re working with a very limited income. This is where it’s important to review (or create) your budget. One budget concept that I really like is the 50/20/30 rule, popularized by Senator Elizabeth Warren.
The 50/20/30 Rule
In simplest terms, this is a budgeting strategy where your after-tax income is divided into three basic categories: essentials, financial goals, and flexible spending.
No more than half of your after-tax income should go toward your essentials. These expenses are absolute necessities, and most of their costs will be fixed. Necessities include housing, transportation, utilities, prescription co-pays, and groceries.
Financial Goals 20%
While a rather thin slice of your overall take-home income, there are a lot of demands that get placed on this category. This category includes both saving and debt reduction. While you might be saving for retirement, an emergency savings, or the down payment on a home or car out of this category, you might simultaneously be trying to pay off a credit card or student loan as well.
This category is also known as “Lifestyle Spending.” We all have lifestyle spending, and it’s important to be aware of which items fall into this category. Cable subscription services like Netflix or Hulu, and meals out are all examples of lifestyle spending. I would go so far as to suggest that most cell phone and high speed Internet plans can be placed in this category due to the “upgrade” culture surrounding the service coupled with the idea that most people do not have the most basic service available to them. Vacations, holiday gifting, and entertainment items such as movie or concert tickets might also be included under flexible spending. As you can see, items in this category present us with the biggest opportunity to save money.
First step, evaluate and categorize current spending. Initially, sit and jot the numbers down into the appropriate category. Next, spend the month gathering data on certain categories: Do you really know how much you spend on groceries? Dining out? Entertainment? No need for judgment, just correct the misinformation.
Once Robert and his partner have documented their current spending, it’s time to evaluate. What do their percentages look like? Was there anything they found surprising?
Robert and his partner are happy with their living situation and use public transportation, as they do not own a car. Everything in the “Essentials” category is pretty well set, with food spending being the only item that varies from month to month.
Look at the “flexible spending” category where a lot of so-called cheap entertainment falls. It all adds up, so Robert and his partner should discuss the following: Is it possible to cut the cable chord or at least shift to a lesser plan? Can we cap our number of meals out per month? Could meal planning help with our grocery spending? Can we switch to a less expensive cell phone plan? Are we paying for any subscription services that we don’t use? Any savings found can be automated to be directly applied to rebuilding their Emergency Fund.
This will take time. Budgets should be considered living documents. They are continually changing. Consider a monthly budgetary check-in to keep household financial priorities in order. Remember, your savings is just around the corner.
Alacias Enger is a performing artist, writer, and educator. She lives with her partner in New York City, and is the founder of blogs “Sense with Cents” and “Travel Cents.” Follow her on Twitter @sense_w_cents. If you have a personal finance question you would like answered in the column, please send an email: [email protected].