Managing your personal finances can often feel overwhelming in Canada, particularly with current financial challenges and rising costs in cities like Toronto, Vancouver and Calgary. The 50/30/20 rule is an ideal and straightforward budgeting framework that will provide you with a balanced budget evaluating your net (after-tax) income by breaking it into three categories: needs, wants and savings / debt repayments. This simple rule is a fantastic framework for Canadian households wanting to improve their money habits and gain better control of their overall finances.
Understanding the 50/30/20 Rule in Canada
The 50/30/20 rule essentially breaks down your take home pay (after-tax income) into three categories as follows:
50% for Your Essential Expenses
Essential expenses are the non-negotiable spending, which can include:
- Rent payments or mortgage payments
- Property taxes
- Utility bills
- Groceries
- Public transportation or car payments
- Minimum debt repayments
- Household supplies
In cities where rent is high, this 50% cap may be difficult to achieve. This is why it’s important to budget regularly and evaluate based on your individual situation. Additionally, a high earner in Montreal may have different allocations than an average earner in Edmonton.
30% for Your Discretionary Spending
Discretionary spending provides you with more flexibility. This may include:
- Gym membership
- Streaming
- Travel
- Dining
- Shopping
Discretionary spending is important to help our quality of life, but it should always be weighed against the need for responsible money management. This is often the easiest category to cut on the budget if your spending habits have been negatively impacted.
20% for Savings and Debt Repayment
The last category is all about your financial future and includes:
- Retirement savings and contributions (e.g. RRSPs, TFSAs)
- Contributions to an emergency fund
- Contributions for extra payments on personal loans, auto loans, or credit cards to pay debt at a quicker pace
- Contributions to investment accounts
If you are self-employed, you may also want to allocate additional funds for taxes or employment insurance to ensure your financial security.
Why the 50/30/20 Rule Works for Canadian Families
Simplicity and Accountability
The beauty of the 50 30 20 rule is the simplicity. Rather than trying to track some arbitrary number of line items, you categorize your net income (not gross income) into three categories. It also helps needs to create spending habits that balance spending and accountability.
Customized for Canadian Tax Reality
In Canada, your pay stub will show your gross income and your after tax dollars (net income). You will use your net income to budget because that is truly what you have in your pocket.
If you budgeted only based on your gross income, that can easily lead to underfunding your emergency fund, retirement contributions and debt payments.
Built for Flexibility
The 50/30/20 is not rigid. For example, if your rental or mortgage payments constitute over 50% of your net income, you can adjust your discretionary spending down to balance as much as you can. Similarly, if you are aggressively chasing debt pay off or accumulating your savings, you can build flexible enough to use the last category as high as you want.
How to Use the 50/30/20 Rule in Real Life
Step 1: Find Your After Tax Income
To find out what your after tax income is, first look at your pay stub, or use the calculator available on the CRA’s website. If you are self-employed, you will want to make sure you’ve deducted what you think will be estimated taxes.
Step 2: Categorize
Once you have your net income for the month, you can categorize your income as follows. For example, if your after tax income is $5,000:
- $2,500 for the required expenses
- $1,500 for the discretionary expenses
- $1,000 for savings and debt repayment
Step 3: Track and Adjust
Once you’ve categorized your income to show as similar as possible to this for 2-3 months, you can use any of the budgeting apps available (YNAB, Mint, KOHO) to track and manage your expenses. Over time, you can adjust the spending plan and continue from that, if you would like.
Budgeting Challenges for Canadians
Housing Costs
Housing costs are a large expense for Canadians and in some of the large urban centres the elevated housing costs can cause increases in other expenses too. If your required housing cost is 50% or more of your after tax income, then you may have to reduce other expense categories, and/or discretionary expenses.
Taxes and the 50/30/20 Rule
Canada’s progressive tax system will complicate budgeting in the real world, especially when you receive various tax credits and benefits. As a note, Canada Pension Plan (CPP) and employment insurance are deducted from gross income, but you should consider the amounts available to you in your after tax dollars.
Average Wage Disparities
Canadians making minimum wage or near the average wage probably have a hard time with discretionary spending and saving. Prioritizing non negotiable expenses and using public services becomes crucial in this case.
Resource: Statistics Canada – Average incomes
Sample Budget Allocations
Let’s look at three examples of Canadian households.
The Average Wage Earner
Take-home pay: $4,000/month
- $2,000 on necessary expenses (Rent, groceries, car payments, etc)
- $1,200 on discretionary spending (Restaurants, travel, etc)
- $800 on retirement savings or debt repayment
The Self Employed Freelancer
Take-home pay: $6,000/month (after putting aside income for taxes).
- $3,000 on necessary expenses (higher cost of rent in a large centre)
- $1,200 on discretionary spending
- $1,800 on savings, investment accounts and/or emergency fund
The High Earner
Take-home pay: $9,000/month.
- $3,500 on necessary expenses
- $2,000 on discretionary spending
- $3,500 on retirement contributions, debt payments and/or investments
These examples demonstrate that the 30 20 budget rule can be workable and flexible when applied to different types of income earners.
Tips to Keep You on Track with the 50/30/20 Savings Rule
- Review your financial goals monthly or quarterly
- Regularly update your budget based on any changes to your income or expenses
- Utilize technology to automate savings and minimum debt payments
- Make best use of tax-efficient retirement savings tools like RRSPs
- Utilize budgeting applications to classify and monitor your spending
Final Thoughts: Building Better Financial Habits in Canada
The 50/30/20 rule is not only a budgeting technique; it is a mindset that helps you develop financial habits in alignment with your current financial situation and desired financial future.
If you are feeling overwhelmed, start with where you can start. Even if you dedicate just 5% more towards savings or debt, you are starting your journey. The goal is not perfection, rather awareness and consistency.
As you become more conscious about your spending habits, you will have more money available for the things that matter most to you: paying off personal loans, building an emergency fund, a down payment on a house. The 30 20 budget rule helps provide you with structure and to make sure you have enough money to navigate the ups and downs of life.
