Understanding how to budget may seem easy, but often times this is the thing that people have the hardest time with. As a person's income grows, people tend to grow into the new income instead of thinking about the consequences of spending all the money they make. This will often lead to people only thinking about budgeting once they are in trouble and it becomes a necessity instead of a choice.

The 50/ 30/ 20 Rule for Budgeting

Intro

50% Lifestyle

30% Housing

20% Saving

This is a concept popularized by Elizabeth Warren and is in my opinion one of the easiest budgets to follow. The original budget was simply 50% Needs, 30% Wants, and 20% Savings. Another way to think of it is simply 80% Present income and 20% Future income (Pareto Principle). I'll describe how I use this myself with clients, but the basic concept will stay the same, and you can choose how complex you wish to make it.


50% of your after-tax income should go into your lifestyle, which includes any debts or car payments, food, cable, internet, phone, childcare, fuel, car insurance, shopping, and any other miscellaneous costs that are related to your lifestyle. Work this out on a monthly basis, so if you pay for anything on yearly just divide it by 12. Most things will be in this category.


​30% of your after-tax income should go to your house and all things related to it. Now house includes your mortgage, hydro, heat, home gas, home insurance, property tax, renovations (which I usually say is 2% of the total home value per year). At this point anything that does not fit into housing, and would not be considered saving or income protection, should be put into lifestyle.


​20% Savings and Income Protection is the final stage of the budget and the most important. Most people do not save enough for retirement unless it is a forced savings implemented by work, and the same goes for income protection (life, critical illness, and disability insurance). By saving and insuring yourself, you will not only stabilize your income for the long term but you will also be living a lifestyle that only needs 80% of your money. 
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