What Is the 50/30/20 Budget, and How to Use It Effectively
Everyone has their own thoughts on how you should budget. From experts speaking on the latest applications for online money management to bloggers giving personal perspectives on cash-only lifestyles, you won’t find a lack of advice in this sector. The 50/30/20 rule is easy to remember and follows a great concept to improve your personal finance.
What Is the 50/30/20 Budget?
The 50/30/20 budget breaks your money up into three easily understood sections: wants, needs, debt and savings in the same category. Sounds easy, right?
You start by calculating your monthly take-home pay. This is your salary minus taxes. If you have a health insurance plan or retirement contributions deducted from your paycheck, add those back in. Now you know your monthly pay so you can now separate your finances according to the 3 parts of your budget.
50% of Your Net Pay for Needs
Divide your monthly pay in half. That number is the amount of money you’ll allocate for needs. Housing, utilities, health insurance, groceries, transportation, and prescriptions all count as needs. Some debt is considered a need as well, such as credit card payments or car payments. If you miss payments, your credit score’s negatively impacted. Other needs include child support and alimony. Missing payments for either will get you in hot water. Therefore, it’s a need.
But that’s not an exhaustive list. If you’re not sure what’s a need versus want, consider the impact if you take it away. Health insurance, for example, is a need because you’ll be fined if you forgo coverage. Plus, it’s essential for your wellness. Trickier situations, such as whether your cell phone is a need or a want, take more thought. It might be a need, but owning anything above a base model cell phone and basic phone plan tilts more toward a want.
People don’t realize that many of their needs are really classified as wants (such as morning lattes, and cable) and they may blow this ratio quickly. If you are having problems justifying what is a need from want, I recommend starting by making an honest assessment of your spending and look for ways to improve and cut back.
30% of Your Net Pay for Wants
Now for the stuff everyone likes: In order to calculate your ratio for wants, you will multiply your monthly take-home pay by 0.3 to find the amount you have in this category. A want is anything that’s not a basic need to survive. Vacations, gym membership, cable and Netflix, and dining out all count as wants. Salon visits and clothes shopping are included in the category, as well. Where the line gets fuzzy is with expenses you may consider essential, but in reality, could live without. This could mean high-speed internet in your apartment or leasing a large car instead of economy-sized.
With the 50/30/20 budget, you allocate a larger percentage of your money for wants versus savings. You may want to change your allocations if your goal is to build wealth or pay down debt as fast as possible.
20% of Your Net Pay for Debt and Savings
To find what you should set aside for debt and savings, multiply your take-home pay by 0.2. For example, if your paycheck (after taxes) is $3,000 a month, you would set aside $600 for debt and savings ($3,000 x 0.2). Savings include emergency funds, retirement accounts, and other financial goals you have. I would recommend you to put your savings away first before paying for other luxuries. If you have a specific savings goal, whether it be for a vacation, retirement, ect.. I would recommend using a saving calculator. If it is for retirement, I would recommend using a retirement, online calculator. These calculators can be found by using the search engine on Google.
As for debt, this category includes student loans or other debt you want to put extra money toward paying off. While the “needs” category may have included a large portion of your essential must-pay debt (such as your credit card), this money is for any extra payments you can make once you put aside retirement or health savings account funds. As an example, if you are looking to pay off your student loan debt quicker, best practice would be to pay two payments on the payment date so the extra all goes towards the principal. You only have to make one payment a month but if you had extra money to go towards student loans and that was a priority, it may make sense to do so.
For more tips, tricks, and ideas around saving, read more at How to Build a Successful Emergency Fund – Emergency Fund 101
Conclusion
You don’t have to feel tied to the 50/30/20 rule. If you want to tweak it to your personal financial goals, you can do so. While you probably don’t want to dip below saving 50% for needs, you can always scale back wants and add more to your savings. On the flip side, if you’re debt-free and have healthy savings, perhaps you can allow yourself more wants. Whatever your financial goals are, remember that making a plan is the best way to meet them. “Failing to plan is planning to fail.”
Finally, MOVE AT YOUR OWN PASTE. I put this in bold because many people try to implement this budget to quickly and are not able to sustain this lifestyle. This usually comes in play due to the savings percentage. Many people think saving 20% isn’t much but when this is put into play, it could shock many. Slowly work towards fully converting your lifestyle following this plan and it will be sustainable for you how it has for me and many others!
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