How to Budget Your Paycheck Like Elizabeth Warren and Jean Chatzky

budget paycheck
No matter how much money you earn, you have two options: You can spend it all quickly or stash it all away in a savings account, withholding from your needs and wants.

You could, though, also find the perfect balance of spending and saving. You could live within your means, have no debt, and have funds left over at the end of each month — all signs that you’ve learned how to budget properly.

Different financial experts give different suggestions for how we should divide up our paychecks. Should we set aside 50 percent for rent? And 15 percent for food? Or 100 percent for transportation? Do our wants or needs come first, and how do we quantify them?

To answer these questions, you’ll find there’s no concrete rule to setting a budget — but finding the right plan for your finances will make all the difference in making ends meet between paychecks.

Here are 6 commonly forgotten expenses that derail a budget >>>

1. Divvying Up Those Dollars the Jean Chatzky Way

We can get by without many of today’s amenities, but we all need a home. Common financial advice maintains that you should be saving roughly one-third of your paycheck toward housing — that can include rent, mortgage, home insurance, maintenance and taxes.

Some recommend 30 percent; personal finance expert Jean Chatzky, on the other hand, says that 35 percent is more like it. Either way, this is where a large chunk of your income should be used.

Likewise, experts advise setting aside anywhere from 10 percent to 15 percent for transportation — car payments, gas, insurance — though up to 20 percent is recommended by agencies like the Credit Counselling Society (CCS).

You should also be devoting 5 percent to 10 percent each to saving money and repaying debt, with another 15 percent toward clothing, entertainment and miscellaneous expenses. The CCS is even more specific on this point, saying that 3 percent should go to medical expenses, no more than 5 percent to clothing, and discretionary spending shouldn’t exceed 10 percent.

Chatzky recommends budgeting no more than 75 percent of your pay toward all of your expenses, leaving 25 percent for miscellaneous or flexible spending or saving.

Here’s a recap:

  • Housing: 30-35 percent
  • Utilities: 5 percent
  • Transportation: 15-20 percent
  • Savings: 5-10 percent
  • Debt repayment: 5-15 percent
  • Food: 10-20 percent
  • Clothing: 5-10 percent
  • Medical: 3 percent
  • Discretionary: 5-10 percent

Budget Chart

Keep reading: How to Budget Your Tax Refund 

2. Elizabeth Warren’s 50-30-20 Rule

It’s called a rule, but it’s merely just a customizable budgeting guide. The 50-30-20 rule takes your after-tax pay and divides it into three categories for needs, wants and savings. The plan was created by Massachusetts Senator Elizabeth Warren and has been touted by Liz Weston for its simple financial efficacy.

Following the 50-30-20 rule involves a few simple steps:

1. Begin with your after-tax income

This will be the net pay listed on your pay stub, after all deductions have been made (like taxes, 401(k), health insurance, etc.).

2. “Needs” are limited to half, or 50 percent, of your income

Needs and must-haves include the expenses you cannot skip, like rent. mortgage, utilities, car payments, auto insurance or food.

3. “Wants” get 30 percent

Weston qualifies vacations, gifts, entertainment, clothes, eating out and other leisurely spending pursuits as wants, or things we can mostly do without. She clarifies that there is some overlap; whereas a cell phone bill is a need, an unlimited or long distance plan, for example, is a luxury.

4. 20 percent is saved or used to pay down debt

It warrants the smallest percentage in the 50-30-20 breakdown, but it’s more important than spending on wants. Here, 20 percent is designed for short- and long-term saving, for emergencies, tuition, future housing purchases or retirement, as well as reducing debt.

“To achieve financial independence and minimize the chances of disaster, you need to get rid of consumer debt, save for retirement and build your emergency fund,” Weston explained on MSN Money. “Any loan payments you make above the minimum belong in this category, as do contributions to your retirement and emergency funds.”

GOBankingRates editorial manager Jennifer Calonia cautioned that the 50-30-20 rule is a malleable structure. “Elizabeth Warren’s rule is at its root a guide,” Calonia said. “Ultimately, you have to make choices in how you categorize each purchase so that none of your budgets are exceeded.”

Why Either Budget Strategy Works

These budgeting guides work because they’re 100 percent friendly to the individual person. They’re not a set of hard-and-fast financial laws, rather a pair of useful money management tools designed to be modified according to your needs.

By learning how to budget according to the pros, you’ve laid the foundation. Now, by using the tips in this article as a template, you can adjust the amount you allow weekly and monthly to your own expenses.

It could be 25 percent toward housing, or 20 percent to saving. Tweak the numbers and see what works for you. Soon, you’ll find the perfect fit according to your income and the cost and amount of your revolving expenses.

Weston warned that some trial and error is inevitable, and you won’t reach your financial goals overnight. The easiest costs to adjust, she noted, are food, utilities and transportation.

“You may be discouraged by how far you are from the ideal,” Weston said. “But running the numbers can help you understand why your money isn’t working for you. If basic overhead consumes so much of your paycheck, it’s no wonder you have trouble saving, paying off debt and living the rest of your life.”

By following one of these two plans, you’ll be able to stop wasting money on things you can’t afford and have enough saved to buy what you want and need. And that is what financial freedom is all about.

Share This Article

  • Gazrok

    God I hate when gobanking articles pop up on flipboard. They are truly clueless…

  • Jake L

    Why? I like a lot of them?

  • Michael

    on paper these tips sound like a good way of going about budgeting but when you have to apply these principles IRL things get sticky.

  • Thorny

    The problem we have is not a spending problem. It is an income problem. All our expenditures are reasonable and necessary. Ie food, insurance etc. we do not spend on unneeded items. Such a budget is unattainable for us due to the economy reducing what used to be a good income.

    I challenged any of these writers to see what they could do on our income.

  • BCB

    Excuse me, but nearly 16 percent of our household income goes to medical expenses and the new healthcare law assumes 8 percent for most individuals. I think that the models presented don’t represent that reality.

  • Some way of life.

    The problem is that the largest expenses are often ones we have little control over. Health/medical expenses for example. Some people live in place where rent and real estate are much higher as well and take up a larger percentage of the budget. I bet many reading this article have student loans to repay. Not everyone ends up in debt because of bad shopping habits. A bad year of medical expenses and car repair can lead to using credit cards for groceries. Our credit industry is predatory and wants to keep you in debt with high interest rates and fees. Instead of lower rates they offer discounts on additional purchases you make with the cards. The options you get for lines of credit for healthcare are often as shady as loan sharks. Do we need better education on responsible budgeting and handing debt for our young people? Absolutely, but we also need low interest rates and affordable monthly payments for people who have good credit and are trying to pay down their debt. The debt epidemic has been highlighted by Elizabeth Warren as a serious economic crisis for our nation, but unfortunately most politicians are not willing to regulate an industry that buys their loyalty. Instead, when times got tough, the banks got bailed out but not the consumers.