Does the 50/30/20 rule still work? (2024)

The ideal ratio of saving vs. spending has been endlessly debated. In 2005, U.S. Senator Elizabeth Warren suggested the 50/30/20 rule which allocates 50% of your after-tax income toward living expenses, 30% toward wants and 20% toward savings. For years, it served as a guideline to help people balance competing demands for their money but, with Canadians currently feeling the impact of inflation, does this rule still apply?

Nicole Ewing, Director of Tax and Estate Planning for TD Wealth, isn’t so sure. She sympathizes with how difficult it can be to save, especially now. “People know whether or not they’re living beyond their means by choice or because things are simply very, very expensive,” she says. “It’s hard to tell somebody who’s living in a studio apartment that they’re struggling to maintain, that they can cut back further.”

Rather than apply the 50/30/20 budget rule, she thinks it’s important to try and save money wherever you can, even if it feels insignificant. “Every little bit that you save, can give you greater control of your own life and your own security,” she says.

She’s not only speaking as a financial professional, but also from experience. When she first lived on her own, she would survive on $20 a week, buying groceries strategically to make ends meet. Her biggest takeaway from that experience was how important it was to save money and eliminate debt. “Man, oh man, am I ever happy that I paid down the debt that I did,” she says, adding that having a clean personal balance sheet opened new financial possibilities.

We don’t have a perfect ratio for splitting your after-tax income, but Ewing offers realistic money habits that could help keep you financially fit:

Find a realistic way to save money

If you do a quick search online, you’ll find all kinds of spending and savings ratios to follow, whether it’s 80% to non-discretionary spending, 10% to savings and 10% to charity, or 40% to daily needs, 30% to wants and 20% to savings. But rules only work if you have money to save, and some might feel like they have nothing left over after covering their basic needs.

According to a 2023 Rent Panda report, many households spend upwards of 45% of their income on housing alone. ¹ In some major cities, more than 60% of income goes to rent. Individuals have it even harder, with rents accounting for more than 70% to upwards of 100% of their income in some instances.

With the basics chewing up such a large proportion of after-tax income, your savings strategy may not match the 50/30/20 rule. Is 3% of after-tax income a doable for you? Then that’s a realistic plan.

Recognize when you’re chasing immediate gratification

With living expenses where they are, there is often less leftover to divide between optional purchases and savings. Money is a finite resource, so when Ewing was starting out, she shifted her perspective from wanting near-term rewards like a vacation to building a good life. Once she took that view, she started to allocate her money differently and make difficult choices about where she shopped, what she bought and where she could cut back.

Consider investing with registered accounts

Given how people are feeling about their finances today, what may be equally important is knowing — and taking advantage of — the savings tools at your disposal. Ewing says she’s constantly hearing from people who are unaware of key tax-advantaged accounts like Registered Retirement Savings Plans (RRSPs), Tax-Free Savings Accounts (TFSAs) and First Home Savings Accounts (FHSAs), or the various ways to invest, including exchange-traded funds (ETFs), stocks or guaranteed income certificates (GICs).

Many people are surprised by how fast their money can grow once they start to invest, says Ewing. While returns are not guaranteed, if you can put away $100 a month for 10 years, earning 5% a year in a registered account, you’d make $3,437 on top of your $12,000 investment over that time.²

Start somewhere and adjust as needed

When you’re saving, it’s important to keep your options open, Ewing notes. For instance, within a TFSA, you are allowed to make tax-free withdrawals at any time if you need cash. Even if your priority is to build an emergency fund, you could consider holding those dollars in liquid investments within your TFSA. Later, as your goals become more defined, you can pull some of that money over to an RRSP or an FHSA, she says. Investing in accounts that provide tax advantages can help to create financial efficiencies: Tax you “save” can be used to contribute further to your investments.

Know how your risk tolerance can impact your investments

While Ewing cautions investors about looking for the quick fix by investing in speculative investments, there are also times when investors play it too safe. If you’re a risk-averse investor you need to understand what returns you may be giving up when you reduce your risk, especially if you’re young and have a long time horizon, she explains.

Understand withdrawal rules and optimize registered accounts

Putting away a percentage of your money is one thing, but it’s also important to understand how your savings and investing accounts work. For instance, there are different ways to make use of tax-minimizing accounts.

Thinking about returns in after-tax dollars is important to Ewing. That’s because where you invest your money and when you plan to withdraw it will impact your taxes and financial situation. If you’re able to keep money that would otherwise be taxed, it is essentially another form of income, which you can then add to your savings, she says. To that point, which account you use to hold your investments can make a difference to what’s left in your pocket.

Understand taxes on foreign investments

For instance, if you’re collecting dividends from companies based outside of Canada, then you may not want to keep them in your TFSA because those payments are subject to a 15% tax. You may not even realize you’re not getting that money because it’s withheld at source, so it’s not even making it to you, explains Ewing. If you’ve inadvertently put a foreign dividend-paying stock in your TFSA, you could consider moving it to another account like an RRSP, where you can keep those payments and essentially increase your return on those stocks by 15%. “That’s found money,” she says.

Saving money can be even harder if you feel you have to do it on your own. Ewing wants everyone to know there is help available regardless of how much you’re investing. If you have a question, you can find many educational tools to help create your own investing journey through TD Direct Investing and TD Easy Trade.

Whether your expenses are 50% or 80% of your income, finding ways to save at least something can help you improve your financial situation over time. Step one, though, is getting your money into an account, says Ewing. “Just get it out of your hands, get it into an account,” she says. “Once it’s in there, figure out how can you get the bigger bang for the buck.”