The 50-20-30 Budget
Budgeting is a cornerstone habit for building wealth. One approach to creating a budget is the 50-20-30 rule.
What is a 50-20-30 Budget
At its core, the 50-20-30 budget divides your after-tax, take home pay into three buckets.
50% goes towards your necessities. These include rent, food, utilities, transportation, or any day to day things. It also includes your minimum debt payments.
The rule of thumb is that these expenses should comprise no more than 50% of your take home pay.
20% goes to long term savings and extra payments on any debt you have. This bucket is for your financial priorities. Your savings for the future and some debt repayment. This bucket does not include short-term savings.
30% goes to your lifestyle choices or your wants. It includes things like vacations, entertainment, hobbies, eating out, cell-phone bills and cable packages. Those things that you don’t need, but enhances your lifestyle.
So to recap 50% is for needs, 20% is for long-term savings and 30% are for your wants.
How does it work?
Now that we know what the 50-20-30 budget is, let’s discus how to put it into use.
The 1st step is to get yourself 3 accounts. Using different accounts, reduces the chances that you will use funds in one category for something else. You most likely have a checking and a savings account already. The checking account we’ll use as the 50%. We’ll use the savings account for the 20%. Now we’ll need an account for the 30%. I recommend another checking account. A checking account gives you a debit card for unlimited access to your funds.
The next step, calculate your monthly take home after-tax pay. If your pay is steady month to month, this will be easy. But, if your pay fluctuates, use the average of 3 months of monthly take home.
We then split the take home pay amount into the respective accounts.
80-30-20 In Action
Now for an example. Let’s assume you make $2,250 a month. That would leave you with $1,125 for your needs. $450 would go toward the long-term savings. The remaining $675 would go toward your lifestyle choices. These are monthly amounts so for those who get paid more than once a month you can split your funds to your liking. For example, Susan gets paid twice a month. She could use her first payment for her long term savings, some life-style choices and some necessities. The second payment would then go to her remaining life-style choices and necessities.
What are the Pros?
Like most proportional budgets, this one can be customized. The 50-30-20 budget is a recommended guideline. If you need to, you can have more or less in each category. If your necessities total to 80% of your total monthly take home pay, it’s fine. The guideline is something to work towards. It’s also much simpler to put in place than some of the other budget systems. It can be set it and forget it once you have a good grasp of your individual percentages.
What are the Cons?
The one caveat that I have for this system is that it can be hard to figure out what is a want and what is a need. When I was trying to put this plan into action I had more trouble deciding if food I buy at work is a want or a need. If you’re one who has no problem deciding what’s a want and a need this system can work for you. Another issue that I have found is that having only 3 categories makes it difficult to . If I’m saving 20% for things such as vehicle repair/maintenance as well as home repair. I can run into an issue that I spend all the money on auto repair and have none for home repair. I’m sure that once I can put more money into the 20% category it would prove a better fit for me.
So now that you know more about this budget system, will you try putting it into action? Do you already have a system that you use? If you do what is it?
Check out my money management system to see my money workflow.
