Given that politics (like weather) is apt to change at any moment, I've never been much in the habit of looking to senators for financial advice. But one senator, Elizabeth Warren, is hoping to change this perception. In a prior life, she was a Harvard law professor specializing in bankruptcy law. She has also co-authored a personal finance book with her daughter, Amelia Warren Tyagi.

The book is called All Your Worth: the Ultimate Lifetime Money Plan.

How rich are you (globally speaking)? 

As of 2011, according to the U.S. Department of Health and Human Services, the American poverty line is currently set as follows:

  • For a single adult: $10,890 (slightly higher in Alaska and Hawaii)
  • For a family of four: $22,350 (ditto Alaska and Hawaii)

I will never forget the first time I realized my own (seemingly meager) annual income places me in the top 1% of the richest people in the world. Want to know where your income places you in terms of global wealth?

Using the 50-30-20 rule 

The 50-30-20 rule is now being feted by financial experts as "a practical money management strategy." Let's find out why!

What you’ll need:

  • Your after-tax annual net income: You can use last year's tax returns if they are handy, or just deduct all federal withholdings and taxes from last year's gross pay to get your net.
  • Your current debt burden: Just make a simple list of your creditors, what you owe, the due date (if applicable) and interest rate (if applicable).
  • A spreadsheet program: Or you can go old school and use pen and paper and a calculator.

Defining the percentages:

  • 50% Needs: Needs = things you absolutely cannot do without, like rent/mortgage, food, utilities and minimum debt payments (to avoid foreclosure or repossession).
  • 30% Wants: Wants = "extras." This category has the most wiggle room. Eating out, concert tickets, new clothes—these are easy "wants." Experts say to be prepared for some inevitable overlap between the "needs" and "wants" categories like Internet, a landline phone and dental insurance.
  • 20% Savings + debt repayment: Not surprisingly, this category is all about building up an emergency fund, saving for retirement and paying down debt.

Tips for implementing the plan

  • Making choices: Ultimately, experts say (including Warren herself) successful implementation of the 50-30-20 rule is all about making choices.
  • Comparisons don't help: Your personal 50-30-20 plan won't look like someone else's, so be prepared to set comparisons aside and work alone or with your partner.
  • Give up guilty feelings regarding the 20%: Setting just 20% aside to save and repay debt is designed to alleviate the "more is more" Western mentality that if we can't save a little or repay it all at once, why even try. Now you can try—20% at a time.
  • Be prepared to make adjustments as you go: If you don't yet know what is realistic for rent or expenses in the area where you live, you will learn a lot as you go. So allow yourself to make adjustments to your categories and to your percentages if the need presents itself.

 

Follow the 50-30-20 Rule and Discover How You Can Save More