GRADUATION 2021: What is the 50-30-20 approach?

Published 3:01 pm Monday, May 24, 2021

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Effective financial strategies vary depending on which stage of life a person is in.

For example, a recent college graduate working his or her first professional job will not have the same financial strategy as someone on the cusp of retirement. But one financial strategy that people of all ages can look to for guidance is the 50-30-20 approach.

Popularized by United States Sen. Elizabeth Warren, the 50-30-20 approach to financial planning can be a valuable resource for anyone trying to develop a budget.

The approach is simple yet effective. Under the 50-30-20 approach, income is allocated based on this breakdown:

• 50 percent of money is spent on needs, including housing costs, health insurance, car payments, and groceries;

• 30 percent of money is spent on wants, including hobbies, dining out and travel; and

• 20 percent of money is allocated to savings.

Proponents of the 50-30-20 approach note that calculations should be based on after-tax income, or what’s often referred to as “take-home pay.”

Professionals with steady paychecks can easily determine their 50-30-20 breakdowns by saving a month’s worth of pay stubs and establishing their monthly budget based on what’s coming in.

The task can be trickier for self-employed or freelance workers, who may benefit from working with financial planners as they seek to create monthly budgets based on the 50-30-20 approach.