Many people stress over bills and struggle how to properly budget in a way to stretch their dollar to fullest. Trying to balance paying for the necessities like mortgage and rent while paying off high interest debt like credits, while trying to save for the kids’ college and invest to secure a stable retirement is often something that keeps people up at night. Trust me! I know! Been there, done that! Not everyone is a money magician, and many would benefit from an easy way to financially plan for today and the future. This post is for you!
Let me introduce you to the 50/30/20 Budget. An easy and commonsense way to create a household budget. It’s a long-standing concept in the financial community and for one simple reason – it works!
So, what exactly is The 50/30/20 Budget? Simply put, it’s a method that divides your after-tax income into 3 categories. 50% for Needs, 30% for Wants and 20% for Saving and Debt Repayment. Let’s break this down a little further to make it easy to understand.
The first category is 50% for Needs. These are expenses that are non-negotiable, and you have every month. This includes housing such as your rent and mortgage, utilities such as heat, electricity; groceries which include food and household supplies, all transportation cost including car, gas, public forms of transportation and the minimum payment on loans you must pay to avoid late fees and penalties. Remember these are all necessities. An apartment or car may be a need, but a luxury condo and luxury suv are not. You need to move additional cost over the basic needs portion to your wants category. For example, a car note for a sedan may be $400, but the luxury SUV may be $850 a month. In this case you will move the additional $450 into the 30% Wants category.
The second category is 30% for Wants. These expenses aren’t necessary for your survival, but they are things you enjoy and put a smile on your face. And I know you have a pretty a smile!! You work hard and we all need to treat ourselves and enjoy life. These include dining out and ordering takeout (sorry but that Uber Eats and Grub Hub is not a necessity), entertainment, vacations including weekend getaways, shopping for gadgets, clothes, and other non-essential items as well as all…and I do mean all subscriptions! Netflix, Spotify, Amazon Prime, all the many, many, many apps and subscriptions we have today. I put an emphasis on this because so many of spent more than we think on our multiple subscription services. Add it all up. Remember, we want to enjoy life but not let it be a financial liability. Moderation and properly monitoring our wants is key.
The third category is 20% for Savings and Debt Repayment. This may be the most important category of them all because you’re laying the foundation for your financial independence and future financial security. You need to make sure you’re creating an emergency for unexpected expenses, contribute to employer or individual retirement savings plan such as 401K, IRA or other types of retirement accounts. Also, use this money to pay off student loans, credit cards, installment loans and other debts you accrue. And finally, investment in mutual funds, stocks, bonds and other investment vehicles.
So now that have the basics about the 50/30/20 Budget, how do you put it to use? Here are some easy steps to follow:
Step 1: Your after-tax income is what you have after all the taxes and deductions have been taken out of your paycheck. If you’re a 1099 employee or self-employed, subtract your taxes and business expenses from your gross amount. This is your after-tax income.
Step 2: Track where and how you’re spending your money. Every penny needs to be accounted for and categorized. We will list helpful apps that can assist you for your convenience.
Step 3: Categorize your spending into the 3 categories: 50% Needs, 30% Wants, 20% Debt Repayment, Savings and Investments.
Step 4: Analyze your spending and make necessary adjustments. See where you can save to not go over the allocated amount. This is where the real hard work starts. You may have to make some hard choices. Do you need that expensive gym membership? What about the monthly dinner with friends? Even your morning coffee. Can you live with the store brand and make it at home? The fancy coffee every morning may cut too much into your budget. It’s hard I know, but your financial future is more important. I will give you a moment…. Ready? Ok…let’s continue.
Step 5: If possible, set up as many automatic payments into your investment accounts and saving. This ensures you’re paying yourself and prioritizing saving and investing in your future.
The beauty of The 50/30/20 Budget is it’s simplicity and flexibility. It’s an easy-to-follow template which allows you to financially plan in a commonsense way that’s proven to work. If you need to adjust the plan you have the freedom to do so. If you want to save and invest more then put 25 or 30% aside for saving and investments. This balance approach encourages mindful spending and make it easier to manage your finances on a day-to-day basis. If you have an income that varies monthly such in sales or a freelance work, base your income on the average income over the last 12 -24 months.
The 50/30/20 Budget checks most boxes for the majority of income earners. Review your budget quarterly and make the necessary adjustments to make sure your spending habits stay aligned with your long-term financial goals. Staying on track with your daily expenses while paying down debt and allocating a sizeable portion of your income to savings and investment can build considerable wealth over time. If you’re looking to retire early, buy a home, start a business or leave a legacy for your family and loved ones, proper financial planning is essential.
I hope this has been helpful and gave you an insight into how to set up a simple yet effect budget plan. I don’t want you to deprive yourself of the things you enjoy, I do, however, want to make sure you’re making good financial decisions. The 50/30/20 Budget is a good no frills template that will hold you accountable for you spending which is something we all can use in our lives. So, stay focused, stick to your budget…and when it’s time for a “planned” Caramel Macchiato you’ll enjoy it even more!!!