A Saving and Spending Formula You Can Live With

In many ways, Elizabeth Warren’s 2005 bestseller All Your Worth was ahead of its time. Warren, a relentless consumer advocate, eschews mindless frugality and focuses instead on finding the right balance so that you always have enough to pay your bills, have some fun, and save for the future. It’s called the 50/30/20 rule and here’s how it works:

Sensible saving and spending formula

The author suggests a simple formula for spending your after-tax dollars on needs, wants, and savings:

  • Allocate 50 percent to needs: These must-haves include housing, transportation, groceries, insurance, and clothes that you really need.
  • Spend 30 percent on wants: Wants include cable television, clothing beyond the basics, restaurant meals, concert tickets, hobbies, etc.
  • Set aside 20 percent for savings: This includes both short-and-long term savings, as well as debt repayment.

Warren encourages saving AND having fun rather than scrimping and pinching pennies on the things that make you happy. That means saving money on big-ticket items like housing and transportation – effectively reducing the amount you spend on needs to free up money to save for the future and spend on wants.

“If you can’t afford to have fun, you can’t afford your life.” 

When I applied this formula to my own spending I found the following breakdown:

Needs took up 53.5 percent of our monthly budget, including the mortgage payment, property taxes, car payment, insurance (life, home, car), groceries, gas, utilities, cell phone, hair cuts, prescriptions, and clothing.

Related: What will it take for you to save more this year?

Wants made up just 18 percent of our monthly spending, including cable and internet, restaurants, alcohol, children’s activities, hired cleaners (bi-weekly), credit card annual fees, subscriptions and memberships, gifts, summer vacation, and discretionary spending.

Finally, savings accounted for 28.5 percent of our monthly budget. This amount includes repayment to our line of credit, contributions to my employer pension, RESP deposits, plus RRSP contributions.

Our car will be paid off late next year, which will free-up $10,000 per year and reduce our “needs” allocation from 53.5 percent down to about 44 percent. Ideally, I’d prefer to shuffle that money over to savings and build up our TFSAs, however I’ll keep the idea of balance in mind and consider adding a few thousand dollars into our “wants” allocation.

Final thoughts on the 50/30/20 rule

A balanced financial plan will ultimately lead to a happier and more fulfilling life. Too many Canadians are living close to the edge financially because they’ve over-extended themselves on house and car payments and can’t afford to live.

RelatedThe Diderot Effect – The curse of upgrading your lifestyle

It’s easy to find your balance. Start with not buying the biggest house you can afford, living closer to where you work, driving your car longer, shopping around for a better mortgage rate, and avoiding money traps like mortgage life insurance, credit protection insurance, and extended warranties.

Being house-and-car poor means having to skip out on indulgences and pleasures that make life more enjoyable, or going further into debt while blindly spending money that isn’t there to begin with.

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  1. Daniel @ SaveWithDan.ca on February 1, 2015 at 11:38 am

    “driving your car longer” or not having a car at all. I did not put on paper all the money we save by not having a car, but still, for some people a car goes into the “needs” category.

    • Echo on February 2, 2015 at 7:51 am

      Hi Daniel, yes – if you can get away with not having a vehicle that would go a long way toward reducing your needs budget.

  2. Barry @ Moneywehave on February 2, 2015 at 12:11 am

    Finding that balance is key. I probably went through a dozen budgets before I was comfortable with my needs/wants/savings.

    Of course that being said, there can always be some adjusting done.

  3. Mark Seed (@myownadvisor) on February 2, 2015 at 5:31 am

    The 50/30/20 formula is a good one. I’ve always found balance is key for us. We could save more, for example, but we wouldn’t be living at all for today.

  4. BetCrooks on February 2, 2015 at 7:01 am

    Do you already have a line in your budget for saving for your next car? If not, that’s where I’d dedicate the $10 000 a year until you have the next car saved for. I’ve always bought my cars with cash. (Ok, I’ve only had to buy 2 cars in my life, but hey Toyotas are built to last!)

    • Echo on February 2, 2015 at 7:54 am

      Hi Bet, I don’t have that line item in the budget right now but I will be allocating some money to short-term savings to cover future repairs. We don’t plan on buying a car anytime soon – I’m fine with built to last 🙂

  5. Norma on February 2, 2015 at 9:09 am

    No mention where “Taxes” fit. Is it an “Need”?

    • Echo on February 2, 2015 at 10:19 am

      Hi Norma, the formula is for after-tax dollars.

      “The author suggests a simple formula for spending your after-tax dollars on needs, wants, and savings:”

  6. Shayne on February 2, 2015 at 10:46 am

    How can “repayment of our line of credit” go under the “Savings category”?

    • Echo on February 2, 2015 at 11:00 am

      Hi Shane, according to the book the savings category includes both short-and-long term savings, as well as debt repayment.

      For example, your regular mortgage payment would go under “Needs”, but any extra contributions would go under savings.

  7. LD on February 2, 2015 at 11:54 am

    This 50/30/20 is worth reflecting on. If housing is in the 50 and one is paying off mortgage – does the principle repayment portion of the mortage payment fall under the 20 savings?

    • Echo on February 2, 2015 at 2:43 pm

      @LD – I suppose you could look at your principal payments as a form of forced savings. The way I see it, you can’t make interest-only payments on your mortgage so I’d consider your minimum monthly payment (principal + interest) to fall under the needs category.

  8. SavingWorkingMomma on February 2, 2015 at 12:39 pm

    I keep reading about how mortgage life insurance is a bad idea. What do you do if you fell for it several years ago? How do you get out and can you recover anything you’ve paid?

    • Echo on February 2, 2015 at 2:51 pm

      @SavingWorkingMomma – Unfortunately, there is nothing you can do to recover payments that have already been made, however you can simply call your bank and tell them you want to opt-out or cancel their mortgage life insurance coverage. You might have to visit a branch to sign a “waiver” in order to get out of the coverage.

  9. Guest123 on February 2, 2015 at 8:45 pm

    Did the author mention where charitable giving falls in that breakdown?

    • Echo on February 2, 2015 at 9:14 pm

      It sounds like gifts and charitable giving goes into the “wants” category.

  10. Helen Hercun on February 5, 2015 at 5:36 pm

    I must have missed that article. Why would you not want mortgage insurance?

  11. Tricia Steenson on February 6, 2015 at 5:56 pm

    I agree with the basic premise, just disappointed not to see a category for
    “giving”. Many of us who have been lifelong frugalistas and are now in the somewhat enviable position of having that extra cash to invest need to remind ourselves to look around and loosen some of the purse strings under the “giving” category. (Message to self….!) Our younger cohorts may feel that they are not able to “give” (there are a lot of hands out) BUT, I think a charitable fund, of whatever size you’re able to generate, needs to be built into the plan.

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