The 50-30-20 Budget is the Only One You'll Ever Need

If conventional wisdom says that to be financially responsible one should have a budget, why do so few of us operate without one?

The answer is easy: budgets are hard to draft, and hard to live up to. Which is why so few of us can come up with a workable model that can keep our spending in line.

So it was a joy to discover that someone had actually simplified things to create a one-size-fits-all budget that anyone, regardless of net worth or anything else, can use.

The 50-30-20 budget was created by the eminently practical Elizabeth Warren. You might've heard of her. She was a Harvard bankruptcy professor recently elected to the US Senate. In 2011, Warren and her daughter Amelia Warren Tyagi wrote a terrific book called "All Your Worth: The Ultimate Lifetime Money Plan," a book that should be required reading for every high school student in Canada. They've come up with a fool-proof way to create a budget that anyone can live with.


Here's how it works.

• 50% - Essential Expenses. No more than 50% of your take-home pay should be spent on essential expenses, which are strictly defined as your housing, transportation, utilities and groceries. Nothing else.
• 20% - Financial Priorities. At least 20% of your take-home pay should go to financial priorities, which are defined as retirement contributions, savings contributions and debt payments. This doesn't include any retirement contributions you make through your employer, such as a RRSP or a pension plan, which is deducted automatically from your paycheque and therefore doesn't figure into this budget at all.
• 30% - Lifestyle Choices. Lastly, no more than 30% of your take-home pay should go toward your lifestyle choices, which encompasses everything else: entertainment, dining out, babysitter, spa visits and personal care, gym membership, cable and cell phone fees, gifts, pet-related costs, and more.

There's no question that it's not easy as it looks, and many of us will find it hard to keep the essentials down to 50% of our income. But if you work towards that, you'll get some great benefits, among them:

If it's so hard to keep to the 50% limit, why do it? Several good reasons:

• It gives you a cushion, in case of hard economic times, or a crisis. Say you lose half of your income overnight. With this budget, you'd still be able to pay your essential bills. If you let your must-haves take up more than half of your income, you have less room to cope with unexpected expenses, reduced pay or working hours, or a layoff.
• It gives you a sense of what you can and can't afford. Having limits means if you're considering adding a loan payment or other contractual obligation to your overhead, you simply check to see if it would push you over the 50% mark. If not, you can consider adding the payment; if so, you don't.
• It gives you a sense of well-being. Making sure you are limiting your basic expenses means there's more money to spend on pleasures guilt-free. It also allows you the space to save for retirement and to get out of debt.

So what should you do if your numbers are out of whack? Remember that the 50/30/20 plan is a goal to work toward, not something you'll necessarily achieve overnight. And if you're already in financial crisis -- you're unemployed, for example, or suffering through a disability -- true balance may have to wait until the crisis has passed.