The 50 – 30 – 20 Spreadsheet – a simple and effective income allocation tool

Happy days, it’s the beginning of the month. You’ve collected your paycheck and settled your tax bill. You’re looking at your salary and thinking about ways to use it. How much to save monthly? How much to spend on beer, ice cream, and pension funds? What do pension funds taste like anyway? No need to despair, I’ve got you covered. Thanks to the 50 – 30 – 20 spreadsheet, income allocation has never been easier. 

We live in an era of budgeting apps, personal finance gurus, and thousands of books seemingly containing the holy grail of investment techniques. 

All well and good, but how can non-finance people get the hang of clever, clear-cut personal budgeting? 

This is where the 50 – 30 – 20 spreadsheet comes in. Uncomplicated and quick, the 50 – 30 – 20 method divides monthly income into three straightforward categories: “Needs”, “Wants”, and “Investments”. 

It might not be the perfect budgeting tool for entrepreneurs with 10 different income streams, but for the vast majority of people, it represents an astute income allocation scheme.

50 - 30 - 20 - spreadsheet - income allocation

Where does the 50 – 30 – 20 method come from? 

As a personal finance tool, the 50 – 30 – 20 rule has become popular thanks to Senator Elizabeth Warren’s bestselling book All Your Worth – The Ultimate Lifetime Money Plan

Adept in personal finance, the presidential candidate made her living as a bankruptcy lawyer and Harvard law professor before going into politics. She constantly published articles and books on American debt problems and income equality. 

Rather than propagating political views, Warren always focused on the importance of personal budgeting and financial discipline. In 2003, the candidate for the upcoming Democratic primaries published The Two Income Trap together with her daughter, financial consultant Amelia Warren. 

3 years later, All Your Worth became her second bestseller and widely popularized the 50 – 30 – 20 rule. Even though Warren didn’t invent the method, her role in spreading its use across America is undeniable.

What is the 50 – 30 – 20 rule? 

In simple terms, the 50 – 30 – 20 method was designed to help ordinary people organize their finances better. By segregating income allocation into three distinct spending categories, the 50 – 30 – 20 rule breaks down your monthly budget into well-delineated and tangible sections. 

Each section has a clear purpose and a clear limit. This makes the 50 – 30 – 20 spreadsheet a popular and timeless budgeting philosophy.   

The 50 - 30 - 20 spreasheet on income allocation - Minimalist Focus

How the 50 – 30 – 20 rule works 

Category 1: The Needs

The first category contains your “Needs”. The Needs are essential everyday expenses related to housing, work, health care, and groceries. As such, the Needs encompass rent and mortgage payments but also normal groceries and transport to work. These should represent about half of your after-tax salary.

If these expenses take up more than half of your income, major changes are needed. In order to remain financially sound, you should think about getting a cheaper rent, changing your transportation habits or ditching your car altogether.

Category 2: The Wants

The second group comprises the “Wants”. These are non-essential things that you want in your life. Think of a Netflix subscription, a gym membership, tickets to an NBA game, or that upcoming European vacation. The “Wants” should take up no more than 30 % of your after-tax income. 

Cutting down on Wants is an upsetting yet relatively easy process. If your Wants exceed 30 % of your income, you’ll have to start prioritizing. Write down all of your monthly Wants and decide which ones can be eliminated

Category 3: Savings and investments

Finally, the third section concerns savings and investments. 20 % of your salary should be allocated to an emergency fund as well as different forms of investments. 

Depending on your income and financial expertise, saving could make more sense than investing. Notwithstanding current interest rates, you’ll always need a “rainy days fund”. This emergency fund should be nourished every month. 

When it comes to Category 3 investments, act in accordance with your experience and financial knowledge. In short, if you aren’t an expert, don’t try to invest in uber-complex, unorthodox get-rich-quick schemes. Keep it conservative and safe. 

In this context, if you are solely looking for ways to save money on a tight budget, investments should be limited to stable products like pension schemes.

Example of a 50 – 30 – 20 spreadsheet

Here is an example of a plain vanilla 50 – 30 – 20 spreadsheet. Please keep in mind that all of these amounts are expositional and do not reflect any real products or services. The amounts merely serve as a benchmark for what an average spreadsheet could look like. 

Minimalist Focus - example of a 50 - 30 - 20 spreadsheet

Pros and cons of the 50 – 30 – 20 

The 50 – 30 – 20 spreadsheet is an intuitive and simple tool for people with a monthly paycheck. If you are new to personal finance or simply interested in income allocation, the 50 – 30 – 20 rule is one of the easiest ways to organize your budget. 

By providing clear spending limits, the tactic works best with average middle-class salaries. The 50 – 30 – 20 is also a great way to install some financial discipline in the lives of budgeting novices. 

On the negative side, the rule doesn’t work well for families with lots of unpredictable Wants. In this context, kids’ toys and products are often hard to define in a 50 – 30 – 20 spreadsheet. Whilst it’s possible to use the rule as a couple with kids, it works much better on an individual level. 

It is in fact much easier to characterize personal spending habits because they concern only one person. Your apartment is clearly a Need and your golf club membership is clearly a Want. Your partner, on the other hand, might consider his or her car a Need while you might say it is undoubtedly a Want because it’s not the only way to get to work. 

Another disadvantage is the lack of flexibility for entrepreneurs. If you have fluctuating income streams as well as irregular tax bills and returns, the 50 – 30 – 20 rule might not work well on a monthly basis. 

Conclusion on the 50 – 30 – 20 spreadsheet

The major question is whether a 50 – 30 – 20 spreadsheet works for you. As a rule of thumbs, the system does wonders for employees with a regular paycheck and tax bill. 

Especially at the start of your career, getting your finances right is crucial. Accordingly, well-defined budgeting tactics can build a solid financial foundation for years to come.

As analyzed in hundreds of personal finance books, lifelong budgeting problems are often the result of excessive spending during the first 10 working years. 

No matter what stage you’re at, the 50 – 30 – 20 rule can be a supportive force when it comes to planning your income allocation.

Useful links on The 50 – 30 – 20 spreadsheet – a simple and effective income allocation tool

  • more in the section “Finance”
  • All Your Worth – The Ultimate Lifetime Money Plan on Amazon

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