What is the 50/30/20 budgeting rule of thumb anyway? And more importantly, How can I try this right now?! The 50/30/20 budgeting technique is one of many giving you an outline to divide up your expenses by percentages.
I’ve also discussed my personal method of budgeting (30/30/25/15) which is similar as it is percent based as well. If your earned income varies or is the same because of a salary, you can all use this method.
Salary income generally stays about the same, so this would be more like a road map to allocated your funds. If you have variable income using a percentage-based budget might be the best one since your income changes often.
The 50/30/20 way of budgeting was created by Senator Elizabeth Warren. She wrote about this in her book: “All Your Worth: The Ultimate Lifetime Money Plan”. She co-authored this book with her daughter Amelia Warren Tyagi in 2005.
How it works
First things first, calculate your After-tax Income. Many employees already have these deductions made out of their paychecks. So generally what’s taken out is state tax or local tax, federal income tax, Medicare and social security.
For self-employed individuals, you would need to minus your tax expenses and or business expenses. After these costs, conclude the remaining amount is what’s left to budget.
The basics of this strategy are to divide up your income and section by 50% on needs (I call it expenses), 30% wants and saving the 20% leftover. Whether you budget monthly or on payday you want to divide that amount between those percentages.
I personally do two budgets one monthly and also bi-weekly. My payday runs on a bi-weekly schedule. At that time, I do a budget review and a quick budget till the next payday. I call this me zooming in on my expenses. My monthly view is best for getting an overview of this matter.
There are many different budgeting strategies. If you’re focused on learning this particular technique it’s best to know the basics. If you need a quick reminder or maybe a beginner at budgeting I recommend reviewing these posts.
Budgeting skills 101: Basics to Budgeting method
Let’s dive into the categories
50% = Needs
The 50% portion is supposed are to be for needs and obligations. These are bills, and expenses, groceries, healthcare, pretty much everything you have to buy or pay for. A great tip to figuring out if something belongs in this section is to ask yourself “Do I need this?”
This part is the hardest because you really need to examine your expenses and make sure it fits in this range. You might need to cut somethings back or increase your income to cover more.
30% = Wants
Now 30%, my favorite part, the “Wants”! These are things that are not really crucial or essential to your life. To put a big insight on this “your cable bill!”
Knowing you want to be entertainment but do you really need it? Cable, internet, I’m sorry folks this is a want.
Let’s also toss in there some other fun things, like eating out, or movies, and vacations! Wow, does this feel like fun? Plenty of stuff we want that we can cover in our budget. The trick to this is staying in that 30% bubble.
20% = Saves
Lastly, our 20% category “Savings”. This is where you grow into transferring your income into a savings account or other investments. When you think of savings in this section, this is everything saving, your emergency fund, stocks, retirement, and sinking funds.
There are many different ways and strategies to budget your finances. Personally I think this is a good way to get started as a beginner. I don’t want my expenses to always take up 50% of my income at most 30%.
The 30% I cover in the percentage model I’ve created is best for me. There is 30% separated in a fixed category, the other 30% is variable. As your life changes, you can always add another miscellaneous spending. You can be adding another insurance policy for the short term, or paying a consolidating loan for 12 month period. In any case, variable meanings its subject to change.
So how do you feel about this way of budgeting? I would love to know if you tried it or will be trying it. I believe implementing a strategy is the best way to begin budgeting.
Start something to see if you’ve improved that month, then review yourself. Progress is just simply progress, moving forward is key.