Takeaways
- The 50/30/20 Budgeting Method is easy to use and implement.
- All spending is bucketed into three spending groups: needs, wants, and savings.
- Budgeting brings clarity to your financial decisions throughout the year.
- The 50/30/20 Budgeting Method gives you concrete boundaries to follow.
- Saving is an essential component of this budgeting method that can give you financial security.
There are a variety of different budgeting strategies. Like much in personal finance, there is no perfect solution for everyone. However, there are tried and true budgeting strategies which have garnered immense popularity because they are easy to use and effective. The 50/30/20 is one of those methods.
What is Budgeting?
Budgeting is the process of allocating your income to your expenses and financial goals. How much money you make can affect how you feel about budgeting, but the reality is that no matter the size of your paycheck, it is necessary to make every dollar count.
At the very basic level, budgeting is the process of assigning every dollar of your post-tax income to a job. This means paying a bill, making a credit card payment, paying the mortgage, saving for an emergency fund, or investing. If you earn more money, the dollar figures in your budget might increase, but you won’t escape the need for financial planning.
Budgeting increases your wealth, financial security, and net worth. As a tool designed to help you be smart with your money, a detailed budget can help you track expenses, spend more on things you love, and help you grow your money.
50/30/20 Budgeting Calculator
Start with your monthly after-tax income and see what you have for each category of spending under the 50/30/20 budgeting method. Check out the Smart Money calculator below:
Calculator
The 50/30/20 Budget
What is the 50/30/20 Budgeting Method?
The main reason the 50/30/20 Budgeting Method is so popular is that it is easy to implement. If you are budgeting for the first time, the process may take some adjustment. A 50/30/20 Budget breaks down what you can spend your after-tax income on into three broad categories: Living Expenses (50%), Personal Wants (30%), and Savings (20%).
The 50/30/20 budgeting method was designed to help households save a healthy chunk of their after-tax paycheck. As a first-time 50/30/20 method implementer, take a few months to titrate your allocations. In your first month using this budget method, you might only be able to save 5% of your take-home pay. Try to increase this amount each month.
Smart Tip:
You can automate your finances to make the budgeting process even faster and remove decision fatigue from your financial life.
Living Expenses and Necessities: 50%
According to the 50/30/20 budgeting method, you should allocate 50% of your net income to your essential living expenses. These are expenses you can’t live without.
- Rent/Mortgage
- Groceries
- Utilities
- Transportation
- Phone Bill
- Car and Home Insurance
It is important to note that if you use your credit card to pay for essential living expenses making on-time payments, which increases your credit score, is part of this process.
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Personal Spending and Wants: 30%
Now we are getting to the part you have been waiting for, spending on things you love. Let's focus on your personal spending category. Personal spending is buying items you don’t necessarily need but want to purchase. For most, this includes all the finer things in life:
- Dates
- Travel or Vacations
- New Clothes or Shoes
- Workout Classes
- Going out with Friends
- Furniture Shopping
As mentioned earlier, this is where high-income earners have the most trouble. If you have ample discretionary income, consider whether it is a healthy long-term idea to invest or spend on personal wants.
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Smart Tip:
Personal finance experts recommend investing more early in your career so that your investments can earn more money through passive income, like dividends.
Savings and Debt Repayment: 20%
Once you have allocated your income to your necessary living expenses, it is time to turn toward your savings goals. The best part about the 50/30/20 budgeting method is that it prioritizes saving over personal spending (our next category). Prioritization helps you with savings goals:
- Emergency Fund: Saving for an emergency fund is one of the first smart money moves you should make. An emergency fund will help you distance yourself from living paycheck to paycheck.
- Slush Fund: If you already have an emergency fund, you should save for a slush fund at least 3-6 times your monthly expenses. A slush fund will give you financial security, and if you lose your job, it provides enough time, without adjusting your lifestyle, to look for your dream job.
- Saving for Retirement: This includes investing in your employer-sponsored 401(k) account (if you are lucky enough to have one), Traditional IRA, Roth IRA, or other retirement accounts.
- Investing: Investing in stocks (individual stocks, mutual funds, or ETFs) and bonds is one of the best ways to grow your wealth over time.
- Paying Off Debt: Paying off your student loans or credit cards can help increase your net worth and decrease future borrowing costs. Making payments above the minimum will erode your debt and leave you in a healthier financial position.
Smart Tip:
If you have savings in an emergency or slush fund, park your money in one of the best high-yielding savings accounts to earn more income.
Other Budgeting Methods
If the 50/30/20 budgeting method does not work for you, plenty of other budgeting strategies work for millions of households. Below are some of our favorites:
- Passion Budgeting
- Envelope Budgeting
- Pay Yourself First Budgeting
- Pack Check Budgeting
- Zero-Based Budgeting
Trying the 50/30/20 budgeting method may be perfect for you. It might take time to achieve the recommended spending allocations. Saving 20% of your after-tax income might seem ridiculous, at first. Then you might turn into a FIRE fanatic. Alternatively, that same saving rate might seem entirely out of reach. Find a budgeting strategy that works for you.
What is the Best Budgeting Method?
Simply put, there is no perfect budgeting method. Most people evolve their budgeting methods with where they are in their personal finance journey.
Passion budgeting could be a wonderful fit for young professionals looking to align their spending with things they love. For others seeking to double down on their saving, the pay-yourself-first method could be right up your alley. Experiment and tinker with budgeting methods to see what sticks. Above all, make sure you are budgeting to meet your financial goals.
Smart Summary
While you want to choose a budgeting method that works for your personality and saving goals, the most crucial attribute of a budget is to control your expenses to allocate more of your hard-earned money to paying off debt and investing to increase your net worth.
