In 2006, Senator Elizabeth Warren of Massachusetts introduced the 50/30/20 rule. She shared the concept in her book All Your Worth: The Ultimate Lifetime Money Plan, and ever since, the 50/30/20 rule has been a gold standard for personal finance budgeting.
Because the average monthly Social Security payment of about $1,900 is not enough to fund most retirees’ idea of a comfortable retirement, implementing a daily living plan to set aside a significant portion of one’s income for long-term savings is important.
The 50/30/20 rule is not a law but a concept designed to help people who have difficulty sticking to a budget put their savings plans on autopilot.
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Senator Warren, an expert in bankruptcy law, believes that a person’s after-tax income should be divided three ways:
50% to needs30% to wants20% to long-term savings
Personal finance author Jean Chatzky offers a variety of tips on personal finance and savings to help people plan for a comfortable retirement.
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Many financial planning experts agree with Warren and also agree that one major benefit of her idea is its flexibility. The budget can be adapted to best fit a household’s particular needs, but the idea is to have a plan and stick with it. Maybe because of where you live and because of inflation and how it’s affecting the price of food, your budget looks more like 60/30/10, at least temporarily.
Jean Chatzky explains how to prepare for long-term Social Security and retirement spending
In order to help figure out how to set aside a significant amount of money for retirement, one first needs to get a handle on current spending. To help achieve this goal, it’s important for a person to understand a clear definition of needs as opposed to wants.
An individual’s needs vary, of course, but there are some basic things most people need to pay for each month. The necessities that make up the 50% portion of a budget typically include:
Housing (rent, mortgage)Utilities (electricity, water, telephone, internet)Transportation (car payment or bus/train passes, parking and commuting fees)Groceries ChildcareTuitionInsurance (car, home, renter’s)Loan payments (student loans, credit cards)Healthcare (insurance premiums, deductibles, medications) Emergency fund, ideally one year’s worth of living expenses.
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Just like a person’s necessities vary, so will their wants, but a few common wants that account for 30% of a household budget include:
TravelClothingFurnitureEntertainment Charitable donationsFitnessPets
Of course there may be some variations within these categories, but the most important factor is insight into where your money is going.
The final 20% of your after-tax budget should go toward long-term savings, including retirement savings and a one-year emergency fund.
Jean Chatzky discusses making adjustments to the 50/30/20 retirement planning budget
With inflation the way it is and showing few signs of slowing down anytime soon, former NBC Today Show financial editor and author Jean Chatzky shared some budgeting advice exclusively with TheStreet.
“The very first thing people should be doing is making sure they know where their money is going,” Chatzky said. “And I can tell you with certainty that many, many people don’t.” In her personal finance coaching business, Chatzky uses an app to help people see how they spend.
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“We get them to look at where their money is actually going, and they are always shocked, chins on the floor,” she says. Why? Because most people “just go through life and we swipe and dip and tap and click and spend. It’s invisible.”
So step number to setting that realistic budget is paying attention to where your money goes. “The biggest budget buster for many, many people is food,” says Chatzky. “Inflation has had a huge impact.”
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She says being a little more mindful about how you spend your food dollars can go a long way. That could mean making sure you are using the ingredients that you already have at home. “Shop from your freezer before you go to the store,” advises Chatzky, “making sure that you’re eating your leftovers, trying to minimize food waste, doing a little menu planning.”
Just a tiny tweak like that might help you stay within that 50% line item for needs.
Then, when you go out to a restaurant, understand that the prices are going to be higher than they used to be. And that’s something that you just have to account for in your budget.
Regarding the 20% part of the equation, savings, Chatzky has three words: “Automate, automate, automate.”
The only way to save money over the long term and for retirement is to not ask yourself to do it over and over again. Human beings are impulse creatures. We prefer to spend rather than save. It feels better to to our lizard brains. And so the only way to successfully build savings is to do it automatically. And that means if you work for an employer, that will split your paycheck and funnel some of the money into a savings account, do that.
If you don’t work for that kind of employer, do it yourself. You know when your paycheck is going to land. Make sure that some of that money is being siphoned off and put in a separate account. Separate is really important because you don’t want to see it. Every time you look at your spending account, make sure you siphon it off, put it in that separate account, put it into a place where it’s going to earn the highest rate of safe interest and just keep going.
And keep an eye on your progress, advises Chatzky. Look at your savings progress every once in awhile.
“Pat yourself on the back a bit. You have to show yourself that you’re actually doing the work, that you’re doing a good job, and that will just like when you see pounds rolling off the scale, and that inspires you to stay on the diet … this will inspire you to keep saving because you’ll see that you can actually save.”
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