Making Cents with Liam Croke: 50/30/20 rule brings order to your finances

Making Cents with Liam Croke: 50/30/20 rule brings order to your finances

Senator Elizabeth Warren explained the 50/30/20 rule in her book, ‘All your worth: The ultimate lifetime money plan’

If you are struggling to save or pay off debt or do both each month, the majority of people think earning more money would solve their problem, and no doubt extra income would help in both instances.

However, my experience of when this happens, is despite what people think, their financial situation doesn’t improve dramatically. In fact, after a couple of months, they are back to square one and still can’t save any more, despite their income having increased.

They promise themselves that a month or two after the increase occurs, they’ll apply it to their savings or to paying off debt - or both - but they don't, and the result of not acting quickly is that it gets consumed on things they can’t readily identify.

To prevent this from happening, you should work out what the increase is, and don’t wait for a couple of months before you do something with it. Have a plan in place, so a portion of the increased salary is going straight into a savings account or as an extra payment to whatever debt you are carrying.

Earning a higher salary isn’t an option for some people, so the solution to their problem is more difficult; that is to better manage their monthly outgoings.

This can be challenging particularly if someone doesn’t have a monthly budget in place. No matter what anyone says about the benefits of having one, it’s something they are unlikely to set up, or, if they do, follow.

It can get overwhelming trying to figure out and remember how much should be spent on utilities, transport, clothes, food, kids' activities, insurances. The list can be never ending. There are too many categories and too many percentages to remember and track each month.

But having a monthly budget in place is the answer if you have irregular spending and saving patterns. The good news is that there is a very simple and effective way of creating one, which isn’t complicated, is easy to maintain and track, and was first put forth back in 2005, by a US Senator.

Elizabeth Warren, in her book, ‘All your worth: The ultimate lifetime money plan’, put forward a very simple suggestion about how you should spend your income each month, and it became known as the 50/30/20 rule.

The premise is simple, your net monthly income should be split into three separate groupings with a percentage devoted to each. They were:

50% to the must haves which included things like your mortgage, rent, utilities, groceries, insurances, transportation, clothing, loan repayments.

30% should be set aside for your wants which is discretionary spending, so everything you want, but don’t necessarily need ie. eating out, holidays, entertainment etc. (I like having this in your budget although I think the percentage is high, because you need to enjoy yourself as well and spend money on yourself)

20% to be set aside that will go towards savings, investments, debt reduction (payments greater than the minimum payment) and retirement.

So, if for example, you are earning €3,500 per month, if you were to follow the 50/30/20 rule, you should not spend any more than €1,750 on your mortgage, utilities, transport etc. no more than €1,050 in discretionary spending and €700 should be going towards savings and pension contributions.

The percentages Ms Warren puts forward are guideline only and can be adjusted, depending on your situation. If your ‘must have’ payments account for more than 50% of your income, then you have to adjust your discretionary spending, so you could end up with a 60/20/20 split.

For someone who has high expenses e.g. mortgage, kids at college, fee paying schools, they may need to adjust the ratio to 80/10/10 until the kids are off the payroll or their debt has been repaid.

If you are living at home and don’t have rent to pay and you don’t have much if any debt, then your ratio could be 30/30/40, so this rule can be tweaked depending on the situation of the individual or family.

One thing I would caution you against is your immediate reaction to the percentages suggested.

For example, don’t immediately rule out 20% going towards savings.

Take a look at your spending habits and ask yourself: what if I had to make this happen? What choices could you make to make it work. You might need to give yourself that push and ask those hard questions and you’ll be surprised with what you can do.

Following this rule, or a variation of it, will help those who want to get a handle on how better they can manage their money each month. Obviously getting your finances under control is important to your long-term financial wellbeing, so it might be worth a try.

Liam Croke is MD of Harmonics Financial Ltd,

based in Plassey. He can be contacted at or

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