Using the 50/20/30 Budgeting Method is truly one of the easiest ways to understand how to spend your money and will help guide you toward your financial goals!
There are so many excuses for why you can’t create a budget (half of them I have said myself!).
“I wouldn’t even know where to start with making a budget!”
“But I make more than enough money and don’t NEED a budget…”
“I always have unexpected expenses every month that blows my budget out of the water so why even make a budget?”
“I have made a budget before but could never stick to it.”
The list of excuses could literally go on forever. I want this post to be your inspiration for saying “No more!” and hope that you write out your budget as you read along with this post.
Why Do I Need a Budget?
Everyone needs a budget. EVERYONE. Even if you are making millions of dollars a year, you still need a budget!
Having a budget AND sticking to it each month allows you to do the following things:
- Pay off debt
- Reduce money-induced stress in your life
- Go on vacations (without racking up credit card debt)
- Gain financial freedom (stop living paycheck to paycheck!)
- Reach your financial goals
Is it just me or do all of those things sound like something that I want for my life? You’ll notice that I don’t mention eating only ramen noodles or never going out with your friends again. Because honestly doing those things aren’t necessary when you have a budget that works for you!
Budgets get a bad rep as something that restricts you or prevents you from doing things that you want. This might be true of budgets that you have tried in the past, but when you find the right budgeting method and start using it, along with actually FOLLOWING YOUR BUDGET, you will actually be able to do anything that you want!
Whether this is your first ever budget or if you have never been able to stick to a budget or maybe your current budget just needs to be spruced up, the 50/20/30 Budgeting method is what I recommend that you start with.
As life changes and/or as you get savvier with handling your budget, there WILL be changes to you budget. Evaluating my budget is something that I do every month to look for possible changes.
What is the 50/20/30 Budgeting Method
To put it simply, the 50/20/30 Budgeting Method breaks down how you should allocate your income as follows:
– 50% on Living Essential Expenses
– 20% to Savings/Financial Goals
– 30% Personal Spending
Living Essential Expenses – This includes rent/mortgage, utilities, food and commuting/transportation expenses. These are things that almost everyone in any location would have to pay for.
Savings/Financial Goals – This includes your savings, investments, rainy-day plans and debt-reduction payments. There are only a few times that I would encourage you to raise this category’s percentage. One is if you do not have an employer-based retirement fund. Two is if your student debt payments are larger than 20% of your income. The third is if you are debt free and just want to bulk up your savings!
Personal Spending – This category is for literally anything that doesn’t fall into the other two categories. This would include your cable bill, cell phone plan, vacations, shopping, eating out, etc. Some would argue that your cell phone plan is a necessity and if you feel that way then certainly put that in your living essentials category. Keep in mind that having the highest available data plan probably doesn’t quality as a need so just make sure to evaluate what plan you are on and if you could switch to a lower cost one.
*The fewer costs that you have in the personal spending category, the more money that you will have towards paying down debt or adding to your savings/investment accounts. If you need help cutting out expenses from your personal spending, check out my post here on the 10 Things that I Stopped Buying to Save Thousands of Dollars!
Maybe your problem is that you find tracking your expenses to be difficult and boring. This is where I would recommend an app or software to do the hard part for you. The amazing team over at Reviews.com put together an extensive guide to help you figure out which software/app would be the best for you. You can read their personal finance software review guide here.
The Benefits of Using the 50/20/30 Budgeting Method
- Ease of Use – the method is simple and focuses on the totals of each of the three categories, not on the total of the individual expenses within those categories. As long as you stay within the 50/20/30 percentages for each category, then it is completely up to you on how you spend within one of those categories!
- Can Be Used with Any Size of Paycheck – the 50/20/30 budgeting method is based on percentages. Therefore it can be used if you make an entry level salary or if your make six figures a year.
- Flexibility – When you don’t have a set amount of money that you can spend on groceries every month, the 50/20/30 budgeting method allows for flexibility within each category.
- Provides a Great Framework to Start With – As I noted before, your budget will constantly be changing along with your everyday life. This budgeting method is easy to adapt to new expenses or a pay raise.
- Focus on Your Financial Future & Goals – The savings category helps you to pay down your debt AND save for major expenses (like a house down-payment or your dream vacation).
How to Get Started with the 50/20/30 Budgeting Method
- The first step is to figure out what your take-home pay is. This is the amount of money that you get after insurance, taxes, your HSA deductions or any other deductions on your paycheck. Most employers should have your yearly salary or total hourly wage available to you.
If you are self-employed or if your monthly income fluctuates, use an average monthly income amount based on the past year. (Total Income You Made Last Year/12 month = Your Average Monthly Income)
- Take your newly determined income amount and divide it up among the 50/20/30 categories. Using whatever method that you prefer, keep these category amounts saved somewhere! Write it down on paper, use Excel or a Google Sheet or even e-mail it to yourself. The key is to have it somewhere readily available.
For those of you who aren’t fans of percentages, below are some examples of how to do the math!
Example: Monthly Take-Home Income: $1,500
50% Living Essentials: $750 ($1,500 * 0.5)
20% Savings/Financial Goals: $300 ($1,500 * 0.2)
30% Personal Spending: $450 ($1,500 * 0.3)
- Study your expenses. Look at your recent receipts, bank, debit and credit card statements to see how you have spent your money recently. Put each of those expenses into one of the three categories until they all have a home.
- Evaluate your situation. Did your past expenses and purchases fit within the percentages of the three categories?
No: start with the category that you are most out of whack on. Look for ways to cut back on those items. This would also be where you would make adjustments if you have student loan debt payments that are more than 20% of your monthly income.
Make a plan to get yourself aligned within these percentages within the next three months. Don’t try to do it all in one month. It is easy to get discouraged and quit if it doesn’t work out as planned.
Yes: Hooray! Less work for you! But do not take this as a reason to start spending more on dining out if your Living Essential spending is only at 45%. Instead, take that extra 5% and add it to your savings percentage. You can pay down debt faster or save more for retirement.
The 50/20/30 Budgeting Method is the easiest budgeting method to implement. It even allows you to make changes on the fly when life changes. Have you tried the 50/20/30 Budgeting Method? What are your experiences with it? I would love to hear your stories!
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