What is it?
The 50/30/20 rule was coined by Elizabeth Warren (ex US senator) and explained in her book “All Your Worth: The Ultimate Lifetime Money Plan”. It is a simple way to budget, and a guideline for how to allocate your after-tax income into three key buckets: 50% to “needs”, 30% to “wants” and 20 to “savings”.
50% to Needs
This includes all of your essentials, i.e. your must-haves and must-dos. For example, this category covers all of your bills (utilities and phone), groceries, rent or mortgage payments, insurance premiums, and transportation. If your needs account for over 50% of your monthly income, then you may need to consider re-evaluating your lifestyle in order to meet your long-term financial goals.
30% to Wants
This includes your desires, but not necessarily items that you cannot live without. For example, this category covers discretionary spending such as dining out, vacations, extra-curricular hobbies such as wakeboarding or gym memberships.
20% to Savings
Savings are money that you set aside for future use. First, we save for an emergency fund. In other words, we save “for a rainy day”. It is inevitable that at some point in our lives, we will be faced with emergencies or crises in some way, shape or form. Conventional wisdom suggests that an emergency fund should be around 6 months of your basic spending on food, rent and utilities. Second, we save to invest. The type of investments that you choose will depend on factors such as your risk appetite, targeted return as well as time horizon. Third, we save for retirement. The sooner we start saving for retirement, the sooner we can life proof our financial wellness. While retiring before 40 is but a pipedream for most, proper planning can enable us to plan for a more comfortable retirement when we are old and grey.
Conclusion
Ultimately, this is but a guideline to allocating your money to achieve your financial goals. Of course, the percentages can vary depending on factors such as where you are based (cost of living) and how much you are earning every month; one can modify this to suit your individualized needs and personal circumstances. “Needs” and “wants” can also be very subjective as well. With that said, having an intuitive number in mind can help you stay on track and evaluate your spending and saving. There are many financial tools and apps out there that can help you calculate the numbers; having a simple rule such as the 50/30/20 is also easily done on an excel spreadsheet. Once you have everything set up, do not hesitate and get started today!
Disclaimer
This advertisement or publication has not been reviewed by the Monetary Authority of Singapore. It is for information only, and is not a recommendation, offer or solicitation for the purchase or sale of any capital markets products or investments and does not have regard to your specific investment objectives, financial situation, tax position or needs. Investments in the products mentioned herein are not obligations of, deposits in, guaranteed or insured by LGI or any of its affiliates and are subject to investment risks including the possible loss of the principal amount invested. You may wish to seek advice from a financial adviser before making a commitment to undertake any investment. In the event that you choose not to seek advice from a financial adviser, you should consider carefully whether the investment is suitable for you.
The information presented herein is for illustrative purposes only and should not be considered reflective of any particular security, strategy, or investment product. It represents a general assessment of the markets at a specific time and is not a guarantee of future performance results or market movement. Any opinions, projections or forward-looking statements expressed herein or information presented (which includes estimates, graphs, charts, formulae or devices) is subject to change or correction at any time without notice and is not to be relied on as advice. You are advised to conduct your own independent assessment and investigation of the relevance, accuracy, adequacy and reliability of any information contained herein and seek professional advice on them. No warranty is given and no liability is accepted for any loss arising directly or indirectly as a result of you acting on such information.
References to specific corporations/companies and/or their trademarks are not intended as recommendations to purchase or sell investments in such corporations/companies nor do they directly or indirectly express or imply any sponsorship, affiliation, certification, association, approval, connection or endorsement between any of these corporations/companies and LGI or the products and services of LGI. It should not be assumed that investment in the securities mentioned was or will be profitable.
This publication is not intended for use by any person other than the intended recipient and may not be reproduced, distributed or published without prior written consent of LGI. This publication may not be distributed in any jurisdiction or to any person where such distribution is prohibited (including Canada, Japan, the United States of America) or to US persons (as such term is defined in Regulation S under the US Securities Act of 1933).
©Lon Global Investors® Limited (UEN/ Registration No. 198601745D) is a Singapore incorporated company, and is not related to any asset or fund management entity that is domiciled in Europe or the United States.