How to Manage Your Savings: 50/30/20 Rule

Magda Doemeny, CFP®
24 Jun

You may have heard the 50/30/20 rule when it comes to saving. While advisors have used this rule in practice for quite some time it was recently popularized by Senator Elizabeth Warren making it part of mainstream finance. While it's not perfect for every situation, you can use this as your guiding light when trying to answer the question: "How much should I be saving?"

The first place to turn will be your Origin roadmap for the details of your savings plan, but we wanted to share the basics of what this savings approach means. 

In order to understand the numbers presented below, you need to find your after-tax income. This isn’t always easy because the money that ends up in your bank account may have additional deductions other than taxes. A good example is contributions to a company retirement plan. To find your after-tax income, take a look at your “pay stub” which you can find through your Human Resources (HR) or HR portal. On the pay stub, you are looking for your “gross earnings/income” and your taxes. Subtract the taxes from the earnings to find your “after-tax” paycheck (Note, this may not be your true after-tax income depending on whether you owe or receive a refund each year but it is good enough for this exercise). 

Now that you have that number lets go through the definitions. 

50% of your net income (that's your income after taxes calculated above) should pay for your necessary expenses

The keyword here is necessary.  Necessary expenses are things like rent, utilities, debt payments, groceries, transportation, childcare, etc. You'll want all of those expenses to not exceed 50% of your take-home pay. Remember, if your expenses increase over time, ideally your income does too! 

30% of your net income should pay for the extra expenses

Here's where you get to spend that hard-earned money on the "fun" stuff, or your wants. This is anything you enjoy doing that is not "necessary." Yes, travel, going out, shopping, and personal care are all considered "not-necessary." Think of it this way, should you lose your job, what extras would you think to cut back on if you couldn't make ends meet? Those qualify as wants.

20% of your net income should go into savings

Finally, the number we’ve been looking for. If you don't have any specific savings goal, you should aim for 20% of your income to go towards savings. This can be retirement or non-retirement savings, just make sure it's not being spent.

Here are a few example calculations: 

The reason we aim for 20% is that it will take roughly 30-35 years to reach 10x your salary in savings if you are saving 20% of your income assuming a 2% annual raise and 5% annual return on your savings. 10x your salary is another approach some advisors use to determine how much to save for retirement. If you start early enough, you will have time to also save for bigger goals like buying a home! Here’s an example of the savings roadmap you could accomplish.

If you want to calculate your 50/30/20 values, we’ve created a simple sheet. Don’t worry, we can’t access this information, which is why it will ask you to make a copy. You can view that here

Is this right for everyone? 

Definitely not. There are many reasons this rule won’t work for you. It’s possible you can’t save 20% of your income because your necessary expenses are too high (hopefully only temporarily). Others may find 20% is too low. Remember, the numbers above are for getting to a comfortable retirement with moderate purchases along the way. This doesn’t account for large home purchases or paying for college tuition. That will require a higher savings amount. While you may not need to save over 20% during your entire earning years, you may want to save above that at times. Additionally, if you know you have a major purchase on the horizon, you’ll have to find a way to boost your savings to hit your goal without taking a huge dent out of your long term goals like retirement. 

The key here is to be flexible, but pay attention to your regular savings. Don’t overlook the value of creating a habit of saving. The habit, in and of itself, is likely more valuable than the number you are saving. The sooner you get into a habit of setting automatic contributions to your savings account, the better your financial future will look. Even if you start small, make sure you start!