How to Set a 50/20/30 Budget
There are many different budgeting methods you can try to determine the best way to manage your money. But while budget guides may mention these methods or provide broad categories to focus on, they don’t always make it easy to see what your budget will actually look like.
This month, I’ll share a few of the budgeting techniques you may have heard of and how they look on paper (well, Google Spreadsheet).
First of all: the 50/20/30 method. Here’s how broad strokes break up:
- 50% of your monthly expenses go to basic necessities. Your home, your transportation, your food, etc.
- 20% of your monthly spending goes towards savings. You can also group debt payments into this category, as paying off debt will help you accumulate savings later.
- 30% of your monthly expenses goes towards everything else. This can include your gym membership, travel, gifts, and meals.
Let’s take a look at an example budget to show you what it might look like when you first set your 50/20/30 budget, which you can do in a simple spreadsheet or budget app and look at your percentages. I will use the same salary and expenses every time I present an example budget this month.
This hypothetical person makes $ 50,000 a year before federal taxes and pays no state income tax. They do not make any pre-tax deductions in 401 (k) or any other account. Their health insurance premiums are covered by their employer. (As I said, this is hypothetical. We’ll use simple math here.)
A quick glance will tell you that this budget is completely off. You might have noticed that the percentages don’t add up because we are over budget. The costs are higher than the monthly wage for the house, this person spends almost 70% on their daily necessities, and they don’t get much fun each month from their money for everything else, unless they hang out at the gym all the time. …
It’s time to rearrange something.
First, you have a monthly payment on debt in the “essentials” group, when it can decrease in “savings.” It’s not sexy and confusing, but stay with me. The 20% savings category is often referred to as “financial goals”. The easiest way to build up a solid savings balance is not to invest in paying off debt. Focus on paying off the debt and the benefits will flow to other areas of your budget.
So we’ll postpone paying off the debt through savings and then cut back on the emergency fund so that we don’t end up at a loss at the end of the month. (Once the debt is paid off, you can increase your savings again.)
We are now in a better position, but we still have a little more on three parts of the budget. Maybe you like having a strict budget for “everything else” so you can maximize your savings and debt-paying efforts. But you may be able to reduce the number of essentials to balance the situation a little better.
You call your internet company to get a discount on your services. You cut coupons and use discounted apps to spend $ 25 less on products each month. You love to save $ 100 for medical expenses, but you usually only spend $ 60 on prescriptions and copays each month, so you save a little bit knowing you have emergency supplies.
There are 80 dollars. How important is it? Let’s see.
Hey, that’s good. This man still has a super-tight budget, but he prioritizes his monthly savings and debt repayment goals and cuts his monthly spending slightly to get closer to that 50% goal for basic necessities. The sum of the three groups is not 100% because we do not have enough budget. This man has $ 141 a month left to go for whatever he wants. Maybe even evening!
So if you are playing with this type of budget and cannot achieve this 50/20/30 split, then don’t feel like a failure. It takes a bit of trial and error to determine which breakdown is best for you. And depending on where you live and your income level – say, if you live in an ultra-expensive city where housing eats up a significant chunk of your budget – you can never accurately reach your targets. But by seeing the full picture of this method, you can determine how to adjust your spending to optimize your budget as best you can.
And remember – I will tell you over and over again – a budget is a living document. As circumstances change or unexpected expenses arise, you will need to make adjustments. So don’t try to install it and forget.
Are you a fan of the 50/20/30 budget? How do you manage and control yours? Share your methods and experiences in the comments.