The 50/20/30 budget is completely different than the traditional way of budgeting.
When you use the 50/20/30 budget, you allocate certain categories to certain percentages (50%, 20%, and 30%).
The 50/20/30 Rule
The rule of the 50/20/30 budget is to breakdown your expenses into three categories:
2. Savings & Debts
Each category gets a percentage of your take home pay (the money that you bring home after taxes). This method of budgeting is helpful because it gives you a set of rules to follow – sort of like guidance to make sure you’re on your own track.
Needs – 50%
Under the needs category, you allocate 50% of your take home pay toward your “needs”. Needs include your housing, utility bills, groceries, and insurances.
Whatever needs you have, they should not take up more than 50% of your take home pay. For example, your mortgage should not be 50% of your take home pay alone because that would leave you with nothing to allocate toward your utilities or groceries.
Savings & Debts – 20%
The next category is savings and debt payments. Allocate 20% of your take home pay to your savings and debt payments. This includes everything from your retirement contributions, to your car payment, to your student loans.
For example, if you are thinking about taking a vacation that you want to save for, you would make sure to include a percentage within the 20% that you are putting toward this vacation savings.
The 20% allocation is a good measurement if you are considering saving more or going into debt (gasp!) because it is a guideline for you to stick to. If your savings or debts go above and beyond 20%, then you know that you are overextended in these areas.
This is the one reason why this budget doesn’t work for me. I have an unusually large amount of student loan debt. I allocate 50% of my take home pay to my debt. To stay within this 20% guideline I would need to go on an income repayment plan, which would extend the period of time I’m paying off my debt and cause me to pay more in interest.
The point is not to do what I’m doing, but to be aware of your options. Know your financials in detail because no one else will care more about them than you will. I can make the choice for myself because I have my financial goals set. Make sure you’re doing the same thing.
Wants – 30%
The last category is wants. This is where you allocate 30% of your take home pay to lifestyle choices. Entertainment, getting your hair done, a gym membership, clothes – you name it. Anything that is not a necessity falls into the wants category.
What I like about this budget is that it allows you to have a spending plan. You don’t have to feel bad about spending 30% of your income on things you don’t need if you know that you are spending according to your plan. As your income changes over time, you can adjust your budget in accordance with these percentages.
How to Use This Budget
You have to decide which type of budget is best for you. If you’re like me and you’re getting out of massive student loan debt, then you may want to put as much of your income as possible toward your debt.
However, if you’re not getting out of debt, the 50/20/30 budget may be a good choice for you. Using this budget, 50% of your take home pay goes toward your needs, 20% toward your savings and debt, and 30% toward your wants and lifestyle choices.
The key to this budget is having a set guideline to follow and specific targets to stay between. I use Personal Capital (an online tool) to help me stay on my budget. And you can do that regardless of which budget you choose. It’s helpful to keep all of your accounts linked in one place.
A Final Note!
There are so many more resources for you to learn about budgeting. Here are a few I recommend:
- 21 Days to a Better Budget
- The Money Book for the Young, Fabulous and Broke by Suze Orman.
- How to Trick Yourself Into Sticking To Your Budget
Whatever you do, keep learning about money and budgeting so that you start to make better financial choices and live the financial life you’ve always wanted.