The 50/30/20 Budget Method Explained
Budgets.
The very thought of the word can trigger a wide range of panic-inducing emotions for some millennials.
The main concern many people have regarding budgets is the belief that they are restrictive.
People agonize at the very thought of having a budget because they often think it means endless spreadsheets and unhappiness.
What A budget actually does
In actuality, creating a simple budget method is really about telling your money where to go instead of wondering where it went.
Having a set budget allows you to gain insight in areas where you may be overspending. It also can allow you to gain control of your finances.
Making it work for you
If you are concerned about how to budget, are limited on time or just unsure as to where to start then the 50/30/20 budget method may be the best budgeting option for you.
It is by far the easiest budgeting method out there.
This simple budget formula allows you to easily budget for:
1) Your essentials
2) Financial goals
3) Fun Money
Here is the full breakdown of how the 50/30/20 budget works:
Budget 50% To You Needs
Emphasis here is needs.
A Place To Live? Need.
Groceries? Need.
Electricity. Transportation to and from your job. Health insurance.
ALL of these things are needs.
Think about it this way – if it is vital for your monthly survival – then it fits into the ‘needs’ category. Allocate half of your monthly after tax income on these necessities.
As you begin to prioritize your finances you may find that you are spending more than half your income on necessities.
If this is the case, you might want to consider increasing your monthly cash flow with side hustle opportunities or by cutting back.
Budget 30% To Whatever Your Heart Desires
This simple budget method lets you contribute 30% of your income towards your ‘wants’. There are plenty of things that could fall into this category.
For example, you can include your cell phone bill, internet services and gym membership in this category.
Other expenses such as yearly trips and outings with your friends can also be included in this bucket.
The beauty of the 50/30/20 budget method is that it gives you flexibility to prioritize your finances as you see fit. Go ahead and snag those concert tickets if it fits into your budget.
After all, life is about balance. As you work towards reaching your financial goals, allow yourself some flexibility within your budget for fun.
Budget 20% To Financial Goals
We all have financial goals that we are trying to achieve. For instance, I have the financial goal to finish paying off my student loans by the end of 2020.
Perhaps you are also trying to permanently kick Sally Mae out of your house. Or perhaps you might also be trying to save up for a down payment for your first home or super charge your way to an early retirement.
Whatever the goal is, it needs funding. With this simple budget method, you can easily set aside money for multiple goals at a time. You can split the 20% towards financials goals such as:
- Future Home
- Debt Repayment
- Student Loans
- Investing in Yourself.
The 50/30/20 Budget Rule – Real life example:
In fact, let’s see an example of the 50/30/20 budget method in action. Say your income is $3,000 a month after deductions, taxes and 401k contributions.
This is an example of how you could easily budget for your life expenses using the 50/30/20 method:
- 50% – You can spend $1,500 on necessities (housing, groceries, transportation, etc.)
- 30% – You can spend $900 on whatever the f*ck you want (Oreos, Drake concert tickets, Avocado toast, etc.)
- 20% – You can spend $600 towards your big financial goals (buying a house, debt payoff, etc.)
Be Honest With Yourself
All in all, the best budget is the one that works. If you have yet to try the 50/30/20 budget method, go ahead and give it a shot.
Personal finance is just that…personal. Above all, you have to find the budget option that works best for you and most importantly you have to implement it.
