“Budgeting only has one rule: Do not go over budget.” – Leslie Tayne

A budget is in place to provide a sum of money to a particular purpose or cause. Budgeting prioritizes ensuring necessary expenses (needs) are covered before less important costs (wants). It’s a great way to keep your finances in order and keep track of cash inflows and outflows.

50/20/30 Rule

In her book, “All Your Worth: The Ultimate Lifetime Money Plan,” US Senator Elizabeth Warren established a great concept known as the 50/20/30 Budget Rule. What does this mean? 50% of your after-tax income should go towards your needs (necessities), 20% should go towards saving, and 30% should go towards your wants.

50% – Needs

To some extent, we are all guilty of saying “I need this” to ourselves during a retail therapy session (whether its large or small scale). However, what do needs really encompass? Your needs include, but are not limited to:

• Housing – rent or a mortgage
• Bills – electricity, heating, water, phone, insurance, health care, internet, etc. (not including subscriptions)
• Food – groceries (does not include eating out)
• Transportation – car payment and maintenance, transportation passes (i.e., bus or subway passes)
• Childcare

To sustain your lifestyle, your needs should be your first priority. Think of these as obligations that you cannot live without.

Rent or housing payments should be no more than 30% of your after-tax income. At maximum, rent should be no more than 30% of the 50% needed to cover necessities. However, if you find yourself exceeding the 30% needed to cover housing, maybe it is time to reassess your needs and decrease your housing costs. Decreasing housing costs can be achieved by (1) looking for a property with a lower rent, or (2) moving in with roommates.

30% – Wants

Wants are items, services, or experiences that a person spends money on that are not essential. Your wants include, but are not limited to:

• Entertainment – subscriptions (i.e., Netflix, Hulu, Amazon Prime, etc.), concerts, movies, sporting events, etc.
• Food – eating out at a restaurant with friends or grabbing a quick coffee on the way to work (does not include necessary groceries)
• Spending – clothes, electronics, materialistic items

Although our wants are nice to have, they are not necessities and are not given the appropriate allocation that our needs deserve. However, if you think about it, our wants (30%) are equal to the housing allocation (30%) leaving 40% for savings and the remainder of necessity coverage.

20% – Savings

Finally, try to distribute (at least) 20% of your after-tax income to savings and investments. Savings and investments are subject to planning for both the present and future. Presently, you should establish an emergency fund. The emergency, also known as a contingency fund, is a financial safety net that is in place for unforeseen circumstances – for example, losing your job, Covid-19 pandemic, etc.

Note: Most experts suggest having three to six months of saved income in an emergency fund. However, with the recent pandemic, some experts are increasing the suggested amount to eight to twelve months of saved income.

*These are all recommendations. It is up to you to conduct your own research and determine what you do with your money. *

A good option is to open up a TFSA (tax-free savings account). Each year the Canadian government sets a contribution limit on the TFSA – this year, 2021, it is $6000. Think about that as only $500 per month ($6000/12). Keep in mind that if you max out your TFSA and contribute more than the limit, you are subject to a capital gains tax 

Other options to consider include:

• Guaranteed Investment Certificates (GICs)
• Tax-Free Savings Account (TFSA)
• High-Interest Savings Account
• Registered Retirement Savings Plan (RRSP)
• Bonds or Treasury Bills (T-bills)
• Registered Education Savings Plan (RESP – for parents)

50/30/20 Rule in Practice

Below is a chart that assumes various after-tax income levels and the allocated maximum amount that should be used for wants and needs, and the minimum allocation for savings.

*Mobile users – turn phone to the side to view the full chart*

Tip: If you do not know what your after-tax income is, take your paystub or income and multiply it by 70%. This model assumes a conservative 30% tax bracket and is a good starting place for budgeting.

Budgeting at the Grocery Store

Remember watching Extreme Cheapskates on TLC and wondering, “why do these people do that?” Well, we’ve got a more efficient version that not only (1) saves you time, but (2) saves you money at the store. It’s called Flipp!

Flipp is a digital flyer app that provides flyers in your region on a single platform – it is not limited to grocery stores but serves as a great platform to create grocery lists and save money. Once in the app, you’ll be able to browse through flyers, circle items and deals you are interested in, and then add these items to a shopping list. Maybe you are only looking for one particular item and want to know which store offers the best deal? No worries, there is a search bar function that allows you to search for individual items and compare them against stores within your area. Finally, the app lets you know when flyers and deals are upcoming, occurring, and ending. Plus, the app is free!

Conclusion

A common theme in budgeting is to live within your means (or below your means). Regardless of your income, to achieve desired results and live comfortably, a person needs to budget their needs accordingly. This is accomplished by not adhering to lifestyle inflation, and not letting your wants overtake your needs and savings.