The 50% / 30% / 20% rule

The ‘50/30/20 Rule’ is a financial model which splits your budget into three groupings, and if applied correctly, really can lead to financial freedom. The credit for this model goes to Elizabeth Warren and her daughter Amelia Warren-Tyagi who penned ‘All Your Worth’ back in 2005. This powerful little book outlines a money management model which is both applicable and sensible. Ms Warren is a Harvard Law Professor.

The way it works is to divide your after-tax income into three groupings –

50% is for ‘Must Haves’ – these include living expenses and essentials like rent or bond payments, utilities, groceries, school fees and transportation.

30% is for ‘Wants’ – this is everything you want, but don’t necessarily need, like holidays with the family.

20% is for ‘Savings’ – this covers saving for retirement, saving for goals and debt reduction.

‘Must Haves’ cover all expenses necessary to live, but no indulgences. E.g. a gym membership is a ‘Want’ and not a ‘Must Have’ because you can find free ways to exercise if necessary. DSTV is a ‘Want’. House payments, medical aid, utilities, transport and food are all ‘Must Haves’. Eating out is a ‘Want.

The challenge is to keep within or close to the three groups and that means not only cutting down on ‘Must Haves’ and ‘Wants’ but looking at the size of the expense in the category.

In our parents’ day, creditworthy meant something – it meant you could actually afford the debt and the rest of your lifestyle. Today a bank will lend you money to buy a car and a house you can’t easily afford. And then they will also give you a credit card for the rest.

This makes it incredibly difficult to keep ‘Must Haves’ within 50% of your taxable income.

The book has a lot of detail about how to allocate expenses, but the overarching message is that if you can’t get your budget within 50/30/20 – you need to make a plan. This may even mean moving home or downgrading your car or changing schools. This is the sacrifice required to gain financial freedom or peace of mind.

What is arguably the most important grouping is ‘Savings’ at 20%. This will include saving for retirement, saving for goals and paying down debt. Remember, the good debt/bad debt story. Get rid of credit card, store and car debt as soon as you can because this is NOT a saving. Paying extra into you house bond / mortgage IS a saving and will benefit you in the long run. The table below shows you how quickly savings can grow and if you relegate this to a debit order or habit, when you look again, you’ll be a saver.



Have a close look at the debit orders that fly out of your account each month or the contracts you’ve signed and decide if these can be reduced or eliminated altogether. By constant monitoring, and careful adjusting, the more in control of your finances you will be.

If your ‘Must Haves’ are well within 50%, don’t use this as a green light to go wild on spending. You are one of a very fortunate few who is now able to start building real wealth and achieving financial freedom and peace of mind probably within a short period of time. It behoves you to do this and teach others how to in a country where financial literacy is low and savings rates even lower.

Ms Warren’s vision was to give people a framework to manage their finances which would make sure you paid your way (‘Must Haves’), had some fun without the worry (‘Wants’) and saved for retirement and the other big-ticket items (‘Savings’). If you have no idea where to start, this is as sensible a place as ever.

Source: adapted from an article by Candice Paine