You can think of budgeting as a roadmap for managing your hard-earned cash. It’s a tool many of us rely on. Now let me share with you a practical budgeting method I’ve relied on for almost two decades to help manage money: the 50/30/20 budget rule.
If you follow any personal finance blog, you’ve likely come across the term “50/30/20 budget”. You probably know that it’s a practical strategy, making budgeting straightforward by guiding you to divide spending your income in a way that makes sense. But for those of you who aren’t familiar with the 50/30/20 budget, or just want to know more, let’s dig into this budgeting method in some more detail.
In this blog post, we’re exploring the 50/30/20 rule together. I’m going to share the ins and outs, making it easy to understand and apply. Are you ready to take charge of your budget and make those dollars work for you?
Let’s get into it so you can start taking control of your money!
What’s the 50/30/20 Budget Rule?
The 50/30/20 budget rule is a guideline introduced by former Harvard professor and now United States Senator Elizabeth Warren and her daughter, Amelia Warren Tyagi, in their 2005 book “All Your Worth: The Ultimate Lifetime Money Plan”. This book provides a simple formula for people to follow that helps them keep their money in “balance”.
Also known as the Balanced Money Formula, the 50/30/20 budget provides a structured approach to managing your take-home pay. The money you get in your paycheck should be broken up into three types of expenses – Needs, Wants, and Savings. The 50/30/20 budget states that 50% of your take-home pay should go to your Needs expenses, 30% to your Wants, and 20% to Savings and Debt Repayment for wealth building.
Let’s get into these categories a little more.
50% for Needs
Basic needs are the fundamental building blocks of our financial life, much like the key ingredients in a simple budget. These are the necessary expenses we can’t avoid—things like housing, for your rent or mortgage, utilities, for electricity, water, or internet, groceries, and transportation. Essentially, if it’s crucial for daily living, it fits into this category.
Divvying up that 50% is a bit like slicing a pie—be accurate and fair. Take a look at your monthly earnings and make sure half of it goes towards covering these essential needs. Think of it like creating a strong base for a house—you want it to be solid and dependable.
Handling this 50% is about making sensible choices and prioritizing. You might have to get creative, find affordable options, or even negotiate some bills. Don’t forget that this portion of the 50/30/20 budget is all about financial stability. Being able to pay your rent or mortgage on time? Being able to have groceries in the fridge? Those things are the financial equivalent of a good night’s sleep—they’re critical.
So, when life throws unexpected situations at you, you won’t be left scrambling. Focus on needs first, wants later. It’s a budgeting approach that ensures the lights stay on and the fridge stays full, helping you build a strong financial foundation.
30% to Wants
Now, let’s get into the usually fun part of budgeting—your wants. This takes up a 30% portion of the 50/30/20 budget guideline.
Wants are like the toppings on your financial cupcake—nice to have, but not necessary for the usual basic needs of life. This category includes spending on dining out, a Netflix subscription, a short trip, or even some clothes shopping. It’s where the “treat yourself” idea comes into play.
Managing this 30% revolves around finding the right balance. It’s about treating yourself without going overboard. Keep an eye on your spending, set some boundaries, and prioritize what truly makes you happy. Want to go to that expensive restaurant for dinner this week? Go, but maybe hold off buying those top-of-the-line shoes for now.
The key here is finding that balance. It’s about enjoying some luxuries without drowning in debt or financial worry. You should be able to enjoy that treat without being concerned about its cost and how it can affect your finances. So, indulge thoughtfully, seek out discounts, and make sure your financial future stays secure.
Remember, it’s about leading a fulfilling life. Budgeting doesn’t mean depriving yourself. It’s about making space for both responsible decisions and enjoyable moments. So, go ahead, and add a touch of fun to your budget. Just make sure to keep it in check!
20% for Savings and Debt Repayment
So, you’ve got your essentials covered with the Needs section. And you’ve got the fun stuff covered in the Wants section. Now it’s time to set aside 20% of your budget for Savings and Debt Repayment. In the book, the authors talk about Savings after Needs and before Wants. So technically, it’s a 50/20/30 budget. That’s probably how we should think about it. But in reality, we tend to leave our savings for last.
Savings isn’t just a piggy bank you have to put some extra money into. It’s a lifeline for the unexpected and a stepping stone toward your dreams. It’s your “safety net”, or emergency, fund, ready to help you manage life’s challenges with as minimal impact as possible. And it’s also about building for the future—whether that’s a down payment on a house, a trip around the world, or your early retirement dreams.
But we can’t forget the other part of the 20%, and that’s debt repayment. It’s a bit like lightening your load on a journey. Whether it’s student loans, credit card debt, or a personal loan, paying those down, little by little, means you’re getting closer to financial freedom.
Simpler Finances
That’s it. Isn’t that simple?
Well, maybe it’s not that simple. But with the 50/30/20 budget, you don’t necessarily have to track your daily expenses and any of that stuff if you don’t want to. As long as you’re in balance when you calculate your numbers, you can monitor your expenses at this high level, without going into creating numerous categories for your spending. If you’re within the above guidelines, you should be OK.
But why is that?
Well, the authors have you complete a series of exercises in the book where you identify which of your expenses are Needs, Wants, or Savings. To do this, you can look at your spending for the previous 12 months from whatever existing budgeting tool you use or your bank and credit card statements, and then add it all up.
So if you already have a budget, whether you use paper, Excel, Google Sheets, or a service like Mint, you’re ahead of the game. You already have those numbers that you can plug into the formula.
But what if you have no budget?
Well, you’re starting from scratch, but it’s doable. And let’s see how you can do that.
Getting into Balance
The 50/30/20 budget is a guideline for people to use. I think most people who plug their numbers in for the first time will find that their budget isn’t in balance. And that’s where the next step in the book comes in after you’ve done the calculations and realized you’re out of balance.
In that step, you’re given a list of things to do to get your budget into balance. For some, it can include simple financial changes, like finding a more cost-effective insurance provider. For others, it can mean drastic changes that the authors call “radical surgery”, like moving to another state to make more money.
If you’re just out of college or just lost your job, you’re likely out of balance. That’s OK. What it means now is for you to identify the steps that you can take to get into complete balance, or get as close as you can. So if your budget is 60/35/5, maybe try to get it to 55/30/15, with the ultimate goal of getting into balance.
The 50/30/20 budget rule isn’t some government law that you must live by or else. It’s just a guideline. I think it’s a great guideline because this formula can help you avoid the potential pitfalls of effective money management. For example, if you’re spending no more than 50% on your needs, and you lose your job but have a working spouse, you may be able to withstand that drop in income. If you’ve gone through the exercise of trying to see where you stand, you will have already listed your Wants. Armed with this information, you’ll already know those expenses that you can more easily stop spending on until you find another job or find other ways to bring in more money.
Take Control of Your Finances
And as I finish up, I think that’s the beauty of this budget method! It helps you prepare for those Murphy’s Law moments in your life. But you have to be willing to take the necessary steps. I’ve read many blog post comments over the years about people stating that the 50/30/20 budget just doesn’t work for them when some of those people are simply not open to making any changes in their lives. For your, and possibly your family’s, sake, you sometimes will have to take those necessary steps. Otherwise, you may be forced to go into “radical surgery”.
To learn even more about the 50/30/20 budget, you should borrow the book from your local library and read it. Or, you buy it from Amazon, Barnes & Noble, or wherever books are sold.
Understanding and implementing the 50/30/20 budget can be a significant step toward mastering your finances and achieving long-term financial well-being. So why not give it a try? Your financial future will thank you for it!