The 20-30-50 Plan is the Money-Saving Trick That Will Change Your Life

Elle Kaplan, Personal Finance Expert
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how to save money The 20-30-50 Plan

Keeping track of your daily finances can be tedious, overwhelming work. Most experts will tell you to start budgeting, but I’ve always thought of budgets like diets—boring! There’s a difference between having a healthy, nutritionally-balanced approach to eating and counting calories all day. Let’s be honest, who really wants to do that? Not me. Plus, dieting keeps you focused on what you can’t have, so it’s not always that effective. A financial diet—i.e. budgeting—is the same way. Pinching pennies is no real way to get ahead, and tracking every single dollar you spend just feels like a chore.

Instead, a great tool I like to use is something called the 20-30-50 plan. Better than a budget, this is a simple, straightforward, flexible plan that keeps you on track to meet your financial goals.

How it works: First, take a look at your paycheck and figure out your take-home pay for the month—that’s your after-tax pay. Understand that 20% of your take-home pay is for Paying Yourself First. That means that at least 20% of each paycheck, after taxes, goes toward financial priorities, like eliminating debt, paying your student loans, creating an emergency fund, and my favorite, of course—investing!

There’s a reason that this 20% comes first. It’s absolutely non-negotiable. The most luxurious thing you can possibly do for yourself is to pay yourself first. That money will come back to you in a big way. How do you pay yourself first, you may ask? Invest, invest, invest! The one thing all millionaires and billionaires have in common is an investment account. It’s how you make your money work as hard for you as you did to earn it. A Prada bag can’t pay you back, but investing in a diversified portfolio can.

Next, allot 30% of your take-home pay to fun and discretionary things—think dining out, seeing a movie, or updating your wardrobe. This is your “wants” money, and it’s important. How successful would you be if you went on a diet and said, “I’m not going to eat a single dessert for the next six months?” It’s too extreme. Your financial life is no different: There should be room for fun, as long as your basics are taken care of first. And that’s why this 30% piece is in the middle–it’s flexible. However, if you run into any unexpected expenses, it’s this 30% that should shrink first. Not the 20% for Paying Yourself First.

MORE: 101 Mindless Ways To Save Money Right Now

Lastly, no more than 50% of your take-home pay goes towards your basic, essential necessities, like housing, utilities, basic groceries, transportation, and medical care. These are, I repeat, the basics. Sometimes there can be overlap, but use your judgment. A place to live? That’s a necessity. A one-bedroom apartment all to yourself in a fancy doorman building? That’s a want. Basic ingredients to make meals at home count as needs. Gourmet truffle butter, on the other hand, is obviously delicious but it’s absolutely not essential.

And it’s as simple as that. As long as you’re keeping your necessary expenses under 50% of your income and setting aside at least 20% for your future self, there’s still 30% available for you today! Spend it however you’d like. Your hard-earned money is, at the end of the day, a tool to help you create a rich, joyful life you love and can be proud of. Some women love to travel, some love a great bottle of wine, some love fashion. This is your life – it’s up to you!

Elle Kaplan is a personal finance expert and the founder and CEO of wealth management firm LexION Capital

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