The now-famous “50-30-20 Budget Plan” is the brainchild of Harvard bankruptcy expert Elizabeth Warren and her daughter, Amanda Warren Tyagi.
This plan helps people see what percentage of their money they should put towards wants, needs, and savings.
How can you implement the 50-30-20 budget into your life?
The first step is to calculate your after-tax income. If you are an employee, this is how much money you take home each paycheque, whereas if you are self-employed this is the income you have after business expenses and taxes.
(Note: If your employer takes voluntary savings out of your paycheque, such as retirement or health savings, add those back in.)
Now that you know how much money you take home each month, you can build a budget that fairly divides the pie between your needs, the things you want and the money you save.
Needs Get 50 Percent
50 percent of your budget should go to needs, which the Warrens classify as the things you cannot do without. Mortgage payments, utility bills, and car insurance are needs. If you don’t make your mortgage or rental payments, you won’t have a home, and if you don’t pay your electric bill, you won’t have lights or heat. Putting petrol in your car to get to work is also a need. Making the minimum payments on your debt is a need.
Basic clothes and groceries are also needs, but be careful not to mix these up with wants. For example, buying top name brand clothes at the mall or eating out at a restaurant is a want. Purchasing a winter wardrobe from a secondhand store or buying bread, eggs and milk from the store is a need.
Wants Get 30 Percent
Living on a budget doesn’t mean you don’t get the things you want. It just places primary importance on your savings and the things you need.
Wants should make up 30 percent of your budget, giving you plenty of wriggle room when it comes to shopping. Going to the hair salon, purchasing a new video game, or buying a new set of furniture all fall under the wants category. The main idea here is to make sure that your wants don’t exceed 30 percent of your budget.
Savings Get 20 Percent
Saving money is the most important part of budgeting, so it should consume 20 percent of your income. Use this part of the budget to either pay off debt, place money in savings for an emergency fund, or invest for retirement. Since you already have your wants and needs covered, placing the rest of the money in savings helps you build up financial stability.
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