We talk quite a bit about budgets. However, I also know that just as we are all different, so are the types of budgets that work too. If you find that a basic budget is really not for you, then look into using the 50/30/20 budget.
What I love about this type of budget is that it really can work where other budgets have failed. It is easy to use and is not a stringent as other budgets, which is why it works better for many.
Other helpful budgeting tips:
- Why You Need to Use the Cash Envelope Method
- How Much Should You Budget for Groceries?
- How to Create a Budget with Irregular Income
HOW DOES THE 50/20/30 BUDGET WORK?
The 50/20/30 budget is where you look at your income (after taxes) and make sure that no more than 50% goes towards paying your fixed expenses; 20% of your income is saved and then 30% of your income is used towards discretionary spending.
50% ESSENTIALS
To begin, you will set back no more than 50% of your income to cover your essential expenses. This includes items that you need, no matter what you make. Your budget should include mortgage (or rent), utilities, food, clothing, transportation, etc. Your essentials are things you need to live.
This is not where you will include your cell phone as you don’t need that to survive. The idea is that you should never spend more than 50% of the money you make towards these expenses.
20% SAVINGS
Once your essentials have been covered, the next 20% will be towards savings. This should be for retirement, emergency fund and essentials savings. This is what you will call your “get-head” category. This is money you set aside for the annual expenses or to cover those unexpected issues that are certain to come your way in the future.
30% DISCRETIONARY
Finally, the remaining 30% is your fun or “mad money.” This is what you can spend on entertainment, dining out, your morning coffee, etc. It should also include things like your cable bill, cell phone, etc. If you are trying to get out of debt or get ahead with your savings, this is where you will find that extra money. The less you spend on these items, the more you have to pay towards your debt.
This is the section where your debt also lives. It is not needed to live nor is it saving money. That makes it your personal or discretionary spending. You can change the amount, but since it is a bill you need to pay, the minimum must be met before you determine the amount you have left to spend.
The idea is to help you create the idea of budgeting, without the hard rules that surround many budgets. The 50/30/20 budget helps establish healthy budget habits so you can achieve financial success.
Sounds pretty easy, doesn’t it? Let me just show you practical application of putting this rule into place.
BUDGET AT WORK
Let’s say that your take home pay is $4,000 every month. Here is an idea of how your budget might look. Now, keep in mind that this doesn’t include all items you have in your own budget. This is a short version, just used to keep it simple.
FIXED EXPENSES – 50% of income
Mortgage/Rent = $800
Groceries = $500
Utilities = $300
Vehicle insurance = $100
Vehicle payment = $200
Clothing = $100
Total = $1,995 (49.9% of budget)
SAVINGS – 20% of income
IRA savings = $200
College savings = $300
Emergency fund savings = $500
DISCRETIONARY SPENDING – 30% of income
Restaurants = $150
Entertainment = $100
Haircuts = $25
Coffee shops = $25
Credit Card #1 = $50
Credit Card #2 = $125
Kids Sports = $100
Total = $575
This is only 50% of the allotted $1,200. That means you can apply extra money towards the vehicle payment or your debt.
What is great about this type of budget is that you can change the percentages as work for you. So, if you need to set 60% for fixed and 15% for savings, that leaves 25% for irregular spending.
Those who seem to do better with this type of budget are those who do not have regular income, such as hourly with fluctuating schedule and even those with commission driven income. This type is also not as detailed in amounts to spend.
IS THIS BUDGET FOR ME?
If you are trying to get out of debt, I don’t recommend this budget method. The reason being that you need to see exactly where every single penny goes each month so you know what you can throw at paying off your debts.
I would use this if you were debt free and really did not spend more than the same amounts on discretionary items every single month.