I know, I know…another budgeting article. But hear me out, this one’s pretty easy!
First, some quick info on the 50/30/20 Budgeting method and how it can help you
Americans are popularly known to be bad at saving. In fact, the nation boasts high levels of debts and surpassed $27 trillion with the figures increasing on a day-to-day basis. Moreover, the personal savings rate in 2019 fell down to 7.6% from 11% in 1960.
The 50/30/20 assists individuals in their journey of managing their after-tax income. It is mostly utilized to save for retirement, emergencies, and spend responsibly. Households of all kinds should prioritize curating a well-planned emergency fund.
That way you’ll have money at your disposal in case an unforeseen emergency occurs. Moreover, you should consider saving for retirement.
Budgeting plans help you keep up with your goals and stay on track. But if you’re someone who believes that budgeting isn’t for you, you’ve likely been focusing on utilizing complicated budgets that don’t take human errors into account.
That’s where the 50/30/20 budgeting method steps in to make budgeting easier. The super easy-to-use and popular budget helps you allocate your budget in three categories; your financial goals, needs, and wants.
Since this is nothing more than a rough guideline that helps you build a financially sound budget, some people may find that the budget is not strict enough for them. To better understand how you can apply this rule, it’s best to understand the ins and outs of the 50/20/30 budget, its working, and its importance.
Let’s discuss in-depth how you can craft the perfect budget for yourself and incorporate it into your day-to-day life:
All About the 50/30/20 Budget
Amelia Warren Tyagi and Elizabeth Warren introduced the 50/30/20 rule of thumb to offer an easy way of organizing your budget and money. Here’s how you should create one:
50% to Needs
Needs refer to must-have items that you can either not live without or the absence of, which would make your day-to-day life challenging. These entail:
- Utilities like electricity, sewer, gas, and water
30% to Wants
Wants refer to stuff that you desire and don’t necessarily need to survive. These may be as follows:
- Dining out in a restraint
- Digital and streaming like Netflix and so on
- Monthly subscriptions
20% to Your Savings and Debts
It refers to two main areas;
- Savings including retirement contributions, setting money aside for your children’s college, and saving for a home
- Debt payments
These may include the following:
- Starting and fostering an emergency fund
- Paying off debt, starting with the ones boasting a high-interest
- Using a 401 (k) plan as well as an individual retirement account
How to Adjust this Budget to Your Life?
After implementing this budget in your day-to-day life, you may find that the budget boasts too much flexibility.
You may decide that 30% of your budget is a little too much to spend on things that aren’t necessities. But here’s the thing; since a part of the budget is left for your discretion, you can remodel the budget within the 50/30/20 framework to match your goals and needs.
The rule to crafting one is simple; you need to consider your goals. Figure out how your plan-stack up according to the 50/30/20 budget framework. For instance, if your financial plan entails retiring early, purchasing a car or home, or paying off your debts quicker, you may have to up your saving game by greater than 20%.
This budget’s openness and flexibility in no way means that you can’t strive for your financial goals. The easiest way to do so is first to consider your objectives and then build your budget into them.
While you may have to increase a specific savings percentage, that’s not necessarily a bad thing. Budgeting aims to help you meet your financial goals. Therefore removing vagueness, adding subcategories, or readjusting it doesn’t make a difference.
How to Utilize the 50/30/20 Rule of Thumb for Budget?
The fact is that most people either spend too much without saving correctly.
On the flip side, you may be saving too much without spending enough on yourself. The 50/30/20 budgeting structure helps you understand your financial habits and limit poor spending and saving habits.
Learning to save for the near future and spending on necessary ensures that you will meet your short and long-term financial goals. Let’s find out how you can utilize the 50/30/20 rule of thumb to plan out your budget:
Step # 1: Calculating Your Monthly Income
First and foremost, you need to add up what income reaches your bank account per month. If your workplace boasts a retirement plan, you need to figure out how much is withheld.
Moreover, if you pay estimated taxes, make sure you reduce your monthly income.
Step # 2: Calculating Your Spending Threshold
Once you know your take-home pay, multiply it with 0.50-for needs- and 0.20- for financial goals. That way, you can find what the ideal spending should be.
Step # 3: Planning Your Budget
Once you figure out your budget framework, picture each category as a bucket, now you have to fill up each category with your monthly expenses.
Start by listing your monthly expenses under a single category. Next, find out whether you’re spending less than the monthly targets.
Step # 4: Following Your Budget
Track your expenses every month and alter them according to your needs. In this way, you’ll find that sticking to your spending threshold is easier.
Related: Create a budget in 6 simple steps.
An Example of the 50/30/20 Budget
Let’s discuss why this budgeting strategy works through an easy-to-understand example:
With the help of this extensive breakdown of spending and saving, you can better consider how the 50/30/20 budget strategy can help you strive for your goals. You may have to readjust some of your spending patterns.
Take this budget pattern as a general idea and craft one according to your needs and goals.
Why Choose the 50/30/20 Budget?
If you’re new to budgeting, the 50/30/20 rule of thumb budget is an excellent starting point. With three different categories to allocate your spending in, you’ll realize that tracking your spending will be easier.
Let’s discuss what makes this a good budgeting option:
An Excellent Beginning Point
With no more than three categories to track, you may find that monitoring your savings and spending is easier.
Kick start your budgeting journey starts with curating realistic and achievable short-term and long-term goals. After that, craft a 50/30/20 budgeting pattern to help you achieve that.
For instance, if you’re saving up for a down payment of $20,000 on your house while earning $2000 per month, then you’d have to save at least $400 monthly to meet this goal. In this way, it would take you no more than four years to save for said down payment.
However, it’s not vital that you save up only 20% per month; instead, you can increase it to meet bigger and more challenging financial milestones.
Forces You to Think about Need vs. Wants
The 50/30/20 budget helps you break down your spending into what’s necessary and what you want. While being intentional about where you’re spending your money can be a difficult task, doing so ensures you don’t end up spending more than what’s necessary.
Moreover, this budgeting strategy forces you to find out what you truly need and what you simply want.
You may take some time to become comfortable with your new budget; you can rest assured learning the difference will reinvent your financial life. While it’s essential to treat yourself, it doesn’t mean a distinction will destroy that.
Related: Best Budgeting Apps for Couples
What are Some Flaws of this Budget?
Let’s discuss why you may want to steer clear off of this budgeting method:
Not for Low-Income People
If your monthly earning makes it challenging for you to make ends meet, you’ll find that your income’s 20% saving goal is too challenging to meet.
Savings Aren’t Enough
On the other hand, if you have bigger goals like buying a luxurious home, retiring early, and so on, you’ll find that 20% income saving isn’t enough.
For instance, you need at least $330,000 to purchase a median-priced home in most states across the US.
It’s not a ‘Forever Budgeting’ Method
The 50/30/20 budgeting works well for short-term plans. However, it is not ideal for long-term budgeting. It’s because the flexibility of the budgeting strategy is likely to cause problems here and there.
If you’re planning to retire soon, handle unexpected expenses, or wish to take your family on a nice vacation, you may have to boost your savings goal.
At the same time, your needs and wants are likely to change with time. You may even come across a time where you have to spend a higher amount on living expenses.
The 50/30/20 Budgeting Rule Makes Money Management Easier
Budget rule: 50/30/20 is a simple yet intuitive and effective plan that helps people meet their financial plan. The rule requires you to spend no more than 50% of your after-tax income on must-have needs.
Next comes utilizing 20% on savings and debt repayments, whereas 30% of the money is spent on personal interest things. The rule is a well-crafted template that helps individuals manage and track their money.
Moreover, it enables you to save up for potential emergencies and retirement.
In your next budget review or when you decide to start budgeting, try the 50/30/20 budget rule. It just might be right thing that helps you stick to budgeting.