50/30/20 Budgeting Rule Explained for Canadians

There are a lot of rules and potential hacks when it comes to creating a budget that works for your lifestyle.

The 50/30/20 rule is a popular guideline for a reason—it works well for most people.

If you are new to budgeting or looking to rework your budget this year, it might be the perfect fit for you.

But this budget rule isn’t without downsides.

It doesn’t necessarily work for every financial situation, especially if you have inconsistent income or are residing in an area with a high cost of living. 

Here’s what you should know. 

What is the 50/30/20 Rule?

The 50/30/20 rule was popularized by former professor and US Senator Elizabeth Warren in her 2006 book, written with her daughter Amelia Warren Tyagi, All Your Worth: The Ultimate Lifetime Money Plan.

The rule is a basic budgeting guideline that takes the fuss out of creating a budget and simplifies it into three categories—needs, wants and savings/debt.

Focusing on these three categories makes you feel less overwhelmed when creating a budget, avoiding the intimidation that so often leaves people giving up on budgeting soon into the process.

When you look at things using the 50/30/20 rule, it takes the complexity away, leaving you with a simple, easy-to-follow monthly budget. 

50% Needs

The needs category is comprised of your fixed expenses—those monthly expenses you know you will have to pay each month, the things you can’t live without.

These should ideally total up to not more than 50% of your total monthly income after taxes. 

This category can include the following:

• Rent or mortgage payment
• Utilities
• Healthcare
• Basic groceries
• Transportation
• Childcare 

This category will vary depending on factors such as where you live in the world (here in Canada, we don’t spend as much on healthcare for example), if you have children, and if you rent or own your home. 

30% Wants

Your wants is the category where your fun money goes.

According to the book, this category technically includes your internet and phone bill, but I would caution that these are needs in today’s world more than wants, so budget accordingly. 

This category can include the following:

• Cable/internet/phone
• Streaming/subscription services
• Personal care
• Dining out
• Entertainment
• Shopping 
• Travel 

When making their first budget, most people find out they spend a lot more than they realize in this category.

20% Savings/Debt

The final category breaks down differently depending on your financial situation.

You can completely dedicate this income to savings and build up a nice emergency fund and investment portfolio if you are free.

If you have debt, you might choose to dedicate all of it to your debt or split it between savings and debt depending on interest rates and how the math breaks down.

It’s always essential to have an emergency fund set aside.

Still, if you have credit card debt burning a hole in your pocket at a 20% interest rate, it makes more sense to dedicate most of this money to pay off that debt as fast as possible.

You can use your paycheques, post debt, towards building up those savings.  

This category can include the following:

• Student loans
• Credit card debt
• Retirement fund
• Savings

Budgeting Is Not One Size Fits All

As simple as this tool is, the 50/30/20 rule doesn’t always work for everyone.

For example, if you are self-employed, you may not have a reliable paycheque bi-weekly—making it hard to follow this percentage breakdown as it doesn’t account for an inconsistent income.

It’s also not realistic, depending on your income level and where you live.

A young person or single mother living in a big city like Toronto will certainly not be able to spend just 50% of their income on needs—that number will likely be as high as 80% or more because of the incredibly high cost of living.

But a couple in small-town Ontario with no children might find it to be the perfect budget system for them.

The website fiftythirtytwenty.com—inspired by Warren’s book and created by the US federal government, does an excellent job breaking down how this rule does and doesn’t work depending on your particular family situation and location. 

If you find the rule doesn’t suit your particular situation, other great budgeting tools might work better for you.

Getting Started With a Budget

Making your first budget might seem intimidating, but plenty of tools are available to make it easier. 

If you can afford a financial advisor, they can help you set it all up in no time.

However, if you’d rather do it yourself, the best way to start is to take an evening to sit down and comb through your finances and expenses over the past month, and designate them into the needs, wants, or debt/savings categories.

From there, you can see how your budget is currently breaking down percentage wise, and adjust accordingly.

If your numbers are way off because you’ve been spending 40% of your monthly income on wants and only 10% on savings, this can be an eye-opener and give you a new target to reach toward each month.

You can also use this worksheet to input your numbers into this budget style easily.  

The most important thing to remember when creating a budget is finding a budgeting system that fits into your particular money situation.

If the 50/30/20 rule isn’t suitable for you, another set of tools out there will work well instead.

Just remember, the simpler the rule, the easier it is to follow.

Frequently Asked Questions