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Why the 50-30-20 Budget is the Budget You’ve Been Looking For
Creating a budget might sound as fun as standing in line at the DMV. You’ve been there before and know how tedious and time-consuming it can be. Not to mention how tracking your spending or setting spending limits can feel too restrictive.
However, your financial situation is less than ideal and perhaps even dire. You know staying at this pace in the long term isn't sustainable. You’d rather spend your money on things for the future instead of paying down debt from the past. So, where do you start?
The 50/30/20 budget rule is a tried and true method for anyone who has never created or has trouble sticking to a budget. Merriam-Webster defines a budget as “a plan for the coordination of resources and expenditures.”
By the end of this article, you will be able to allocate your expenses into 3 buckets and create a plan that will help you live within some boundaries AND enjoy your life/money.
Let’s get into how to budget using the 50/30/20 plan.
How to Make the 50/30/20 Budget Plan Work for You
Step 1: How much money do you take home?
Identify how much money you make AFTER taxes. This includes all forms of income (investments, side hustles, ect.) If you have a variable income, look at the past year or an average of several years of your take-home pay.
TIP: Always err on the conservative side of financial planning. Not too pessimistic, but not optimistic.
Step 2: What needs do you spend money on?
List all of the necessities you pay for. We are typically blessed to have these items but don’t usually love paying for them. Also, they are more fixed expenses, meaning they don’t fluctuate much month to month.
50% of your income should go to essentials.
Includes:
Your Home (rent/mortgage)
Utilities (electricity, water, internet)
Transportation (car payments, gas, electric charging cost, public transport, rideshare expenses)
Groceries (includes household items like paper towels and laundry detergent)
Health insurance and medical expenses
Minimum debt payments
Tip: Visit your credit or debit card website to find a list of your recent expenses. This will help you better identify precisely how much you’re spending on things like groceries, for example.
Step 3: Identify your wants.
What are the things you spend money on that enhance your life? These expendatures are nice-to-haves but aren’t necessary to live.
30% of your income should go to your wants.
Includes:
Eating out
Entertainment (movies, events, concerts)
Hobbies and activities
Vacations and travel for fun
Subscriptions/Memberships (gym memberships, streaming services, meal prep kits, etc.)
Clothes shopping
Electronics/appliances/devices
Supplements, grooming, extras (massages, hair cuts, etc.)
Tip: Be honest. You can’t help yourself if you aren’t honest about your habits.
Step 4: Identify your savings and debt payment needs.
Consider your debts, such as credit cards, student loans, loans, or any other debts with interest. These are paid down first, and then money is set aside for savings.
20% of your income should go to debt payment and then savings.
Includes:
Debt payment above the minimum payment
Retirement planning (401K, IRA)
Investments (stocks, cryptocurrency)
Emergency fund account
Tip: Note that this percentage includes payment above the minimum payment of your debts. This amount will pay off your debt and not just the interest incurred on it.
Step 5: Evaluate and Adjust
As you inventory where your money is going, you may find it does not fit the 50/30/20 rule. For example, you may be spending more than 30% on wants and need to adjust your spending. You may also find you need to spend more than 20% on debt payments, cutting into your 30% of wants. So your ratios may look more like 50/20/30.
Tip: Your needs may exceed 50%, especially if you have a lower income.
A Couple of Things to Consider with a 50 30 20 Budget
It’s important to note that as your income changes, your plan may change, whether that be reallocating how much goes where or changing your budgeting strategy entirely.
I encourage my clients to incorporate tithing or donations into their budgeting strategy - typically adding it to the 30% category.
Once you have practiced the 50/30/20 rule for a while, it will probably be time to look at specific financial goals and strategies. This step is best accomplished with a professional. Sign up for my email for a free printout of the 50/30/20 rule with more real-life scenarios and a list of financial goals you can accomplish with this budgeting plan. I’m here to help when you’re ready to make a more solid financial plan.
Real-Life Application
Let’s walk through this in a real-life example.
We’ll say you bring home $120,000 after taxes.
You spend $83,008/year or 69% on your needs
Your Home (rent/mortgage) = $2,500/month or $30,000/year
Utilities = $300/month or $3,600/year
Transportation (monthly: $600 car payment plus $150 gas plus $84 maintenance cost) = $834/month or $10,008/year
Groceries = $1,000/month or $12,000/year
Health insurance and medical expenses (example assumes health insurance is paid for before take-home pay) = $333/month or $4,000/year
Minimum debt payments = $150/month or $1,800/year
Childcare = $1,800/month or $21,600/year
You spend $24,400/year on wants or 20%
Eating out = $700/month or $8,400/year
Entertainment = $100/month or $1,200/year
Hobbies and activities = $150/month or $1,800/year
Vacations and travel for fun $333/month or $4,000/year
Subscriptions/Memberships (gym memberships, streaming services, meal prep kits, etc.) = $50/month or $600/year
Clothes shopping = $100/month or $1,200/year
Electronics/appliances/devices = $300/month or $3,600 year
Supplements, grooming, extras (massages, hair cuts, etc.) = $300/month or $3,600/year
You spend $18,100/year on savings and debt payment or 15%
Debt payment above the minimum payment = $500/month or $6,000/year
Retirement planning (401K, IRA) = $910/month or $10,900/year
Investments (stocks, cryptocurrency) None
Emergency fund account = $100/month or $1,200/year
Findings from this example:
In this example, our percentages add up to 104%, meaning this person/couple spends more than they make. The needs spending is much higher than 50%, but if you look closely, it is primarily because of a childcare cost that is likely temporary. This means the couple needs to adjust their spending in the “wants” category to spend less than what they earn and to get financially healthy.
What’s Next?
This exercise can be very eye-opening, but remember, it’s always in a good way! Even if you’re like the example above, you have the power to change your financial situation.
If this sounds like something you’d like to explore with a professional, let’s have a free 30-minute call to discuss the possibilities for your financial situation. Click the button below to schedule a call.
