Article by Satrix Investments

The short answer to this is always "It depends..."

It depends on your age, your lifestyle, your obligations, your hopes and dreams – the list can go on and on.

But a good ballpark rule of thumb was established some time ago by US Senator Elizabeth Warren who said you should save in a ratio of 50/30/20 - also known as the 50/30/20 rule. Ms Warren, a professor at Harvard, reportedly taught this to students while lecturing on the topic of bankruptcy.

Here's how the allocation works:


50% of your after-tax income should be spent on essentials like rent, food, utilities, transport etc. This really is the spend which keeps a roof over your head and food in your tummy. Think of these expenses as "needs" e.g. medical aid or car insurance.


30% of your after-tax earnings is allocated to discretionary or lifestyle spend. This is more in the "wants" camp. Clothing, airtime, eating out etc. Just because there is now 30% waiting to be spent on "wants" doesn’t mean you should spend the money indiscriminately. You still need to allocate it wisely. Further, any shortfall in the 50% or 20% buckets will need to be made up from the 30% bucket.

Remember that in the 50% or "needs" bucket are your essential needs. Even if you view airtime as essential, it will still need to be funded out of the 30% or "wants" bucket, as it really isn’t essential to staying alive (we know some may disagree!).

So you can start seeing how you need to divide up your income so that it can cover the lifestyle that you want, while still allowing you to save.


20% must be used to reach your financial goals i.e. it should be saved, invested or used to pay off debt. But don’t limit yourself to 20%. If you can save more, then by all means do. This will benefit you in the long run. You should be paying off as much of your debt as you can (remember not to take on new debts) whilst also saving for your retirement. Investigate tax-free savings options and if possible also have an emergency fund for those unexpected expenses.

Remember your minimum credit card and car payments fall into the 50% or "needs" bucket. So you need to be paying down those debts and saving 20% of your after-tax money as well.


These buckets are just guidelines – exactly how much you allocate to each item depends on how much you earn and how hard you want to make your money work for you. 

If for example, you’re a high earner, you should try and keep your expenses low and save a much larger percentage of your income.

On the other hand, if saving 20 percent of your income seems impossible right now and more than 20% is going to student debt or credit card debt, don’t despair. This is a framework you can use to work towards. Half the battle won (with having a budget and an investment plan) is knowing where you are going. The 50/30/20 rule is just such guide.  

You may spend in different ratios for a time, but your overall focus is still to reach 50/30/20.

Like most people, you may at the very least want to be secure through old age —as well as having some extra cash for things you want— this is a great way to start getting a grip on where your money is going and implementing a plan which can actually deliver on these goals.


Read more in Personal Finance