50/30/20 Rule

In this email I cover

• What is the 50/30/20 Rule

• What fits into each category

• Explanations for each category

• How I implement it

• Free Downloadable template

​This was a guideline created by Elizabeth Warren, a US Gov Senator, when she was an Econ professor. This basic guideline is a good rule of thumb to gauge personal expenses against to make sure that you have covered your basic needs, can enjoy yourself a little bit and also are saving for the future.

Lets’s go over the basic framework.

50% - Basic Needs (Fixed Costs)

• Examples of Basic needs is

• Rent / mortgage

• Insurance

• Medical costs (dentist etc)

• School

• Groceries

• Gym memberships (will discuss below)

• Netflix Subscription

• Phone Plan

• Utilities

• Software subscriptions

30% - Wants (Guilt Free Spending)

• Examples of Wants are

• Flowers for Valentines Day

• A new tech gadget

• New Clothes (will discuss below)

• Movie tickets

• Beers with friends

20% - Saving (And investing)

• Examples of Saving

• Saving for a house

• Saving for a weekend getaway

• Saving for retirement

• Further Education (Will discuss below)

• Emergency fund of 3-6 months (to discuss in future newsletter)

• Investing in Low Cost Index Funds

• NISA

• IDeCo

• 401K (if you’re in the states)

If you have never sat down to try and picture how much you are spending in each category, try and track your spending and see how much is being used for each bucket, it might just surprise you. To make it easy I have taken Ramit Sehti’s Conscious Spending Plan and changed it into yen so that the numbers are easier.

So this gives you a very good idea of where your costs would be assigned every month to give you a general principal on how to use your money. Now I will explain some points above as I think there might be questions that are worth exploring a little bit.

BASIC NEEDS

Firstly ,when it comes to the 50% you can see that it is not bare necessities such as food, shelter and water but it also covers anything that is recurring and so already has money set aside for. A gym membership or netflix subscription is already pre-determined that you will spend money on that for the month and so it is necessary to set it aside in advance. As a result, the money is not available to use as guilt free spending.

When you add a new line item to your fixed costs, you want to be very careful because it sets the tone of our regular day to day, once added it is very hard to take away. For example if I am used to going to enjoying nice groceries and treating myself to greek yogurt and fresh fruits for breakfast, to then go back to milk and cereal might be an adjustment.

One thing to keep in mind is that this also comes into consideration for gifts or otoshidama. So for example because I have 11 family members that receive otoshidama at the end of the year, I know that I will need to spend that amount in december and so I almost consider that a fixed cost but one that is spent on an annual timeline rather than monthly. Therefore, I will save up a little bit each month so that in the month of December I have the full amount necessary to pay the otoshidama without worry.

WANTS

When it comes to wants, I consider that there are two kinds of wants, there are the wants that you would like to get in that specific month such as let’s say movie tickets or a dinner out, and then there are wants that you know that you will have somewhat regularly like maybe getting a new shirt or pair of shoes.

It is possible to consider that if the cost is one that you know that you will have regularly then you can add it to fixed costs, but because it is still variable month to month, you can also keep it in guilt free spending (if your fixed cost percentage is high for example)

SAVINGS

This bucket covers all savings that you have, so the idea is that once you’ve covered all of your “Basic” needs and your wants, the money left over you can assign to either your upcoming christmas holiday, overseas trip, future wedding etc.

Also items in this bucket would go to investments in purchasing wealth generating assets such as a target date fund or low cost index fund. If you’re thinking how to separate the savings for trips and savings for investing, it is generally best if you can put 7% - 15% if your savings for investing.

How I implement the 50/30/20 Rule

It becomes the 20/50/30 rule.

The reason I move the savings to the beginning is because then I know that my longer term goals are covered for, and then my basic needs are covered, and then what ever is left over I can then use guilt free.

So what does this look like? Once my monthly salary comes in, I have a list of categories that I assign the money to in a zero based envelop style budgeting system. (I will explain more about this in the next newsletter)

And so my first two rows are NISA - 33,000 (what was the previous limit before the new Nisa kicked in) IDeCo - 23,000

This way I know that even as I allocate to other line items in my budget, I am covered here.

Then then next big section is family events, i.e. Valentines day, my wife’s birthday, my daughter’s birthday, my dog’s birthday, christmas, new years, our wedding anniversary etc.

I set the amount of money that I think I need for the event and which month I want to have the full amount saved in and so the software that I use will break it down to how much I need to save in that specific month to target that goal. So for example, for Valentines day, if I want to have 50,000 set aside then if I am planning for 2025, I would already set aside 4166 yen a month so that come next Feb, I will have the full amount.

Personally, my percentages aren’t exactly 20/50/30 but more like 10/75/15

The reason that my pie chart of allocation is skewed is because 75 goes to a shared bank account with my wife where then we recreate the 50/30/20 rule to cover family needs.

I am curious if you look to see how your current expenses stack up what your percentages look like.

I will say, the nice thing with operating as a percentage based system, is that because the monthly allocation is not a fixed dollar amount, the idea is that as your income grows (through job changing, raises or self-employment) you can grow the amount in each percentage and still have your allocation serve you in the present day and in the future.

If you want to chat about your allocation and if you feel that it is off, I am more than happy to have a discussion. Fill out the Conscious Spending Plan and we can talk through it