THE BROKEN WALLET

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What Is the 50/30/20 Budget?

A budget is one of the best tools to control your spending. It can help you plan for expenses, as well as savings, debt repayment, and fun. You can choose from several types of budgets, but one plan that seems to be a favorite among many is the 50/30/20 budgeting rule of money.

This is a simple formula to help you live within your means and save on a consistent basis. So if your current budget strategy isn’t working, here’s a high-level overview of how the 50/30/20 budgeting rule works. I’m breaking down the formula, plus providing a few alternatives (if it isn’t realistic for you at this time).

First and foremost, though, for any budget to work you have to start with your net income or after-tax income. If you use your gross income to figure your budget, you’re overstating your income.

This is how it works…

1. What does “50%” mean?

To put it plainly, the 50/30/20 budgeting rule of money involve spending no more than 50% of your after-tax income on needs.

Now, with regard to the “needs” category, this is where a lot of people mess up. They might put an expense in this category that doesn’t really count as a need. 

To be fair, needs will vary from person to person. But in the simplest terms, a need is something you have to pay for – it isn’t a choice. For example”

• housing
• insurance payments
• utilities
• food (not dining out)
• minimum debt payments (minimum for credit cards, student loans, car payment, etc)

These are common needs for just about everyone. But depending on your situation, you might have to add to this category. For example, do you have young children and pay daycare? If so, don’t forget to include this expense in your needs category.

To reiterate, for the budget to work your needs (combined) should not exceed 50% of your net income. And for this to happen, you have to spend a reasonable amount on expenses.

Unfortunately, some monthly expenses aren’t as flexible.

Take insurance premiums, for example. Sure, you can shop around, compare prices, and ask about discounts. But ultimately, you can’t always control what you pay. The same might be true with utilities or daycare.

You can take measures to conserve energy or enroll in your utility company’s budget plan, where you pay a set amount every month – but typically you have less control over these costs.

You might, however, have more control over other needs like housing and food.

A few suggestions to keep your needs within 50% of your net is to keep your house payment reasonable to your income. 

Ideally, your housing should remain below 28% to 30% of your gross income, if possible. Of course, this isn’t always easy depending on where you live. But if possible, aim for this – even if it means living at home or getting roommates.

As far as groceries, I recently read that a good price point is $25 per person per week ($100 a month per person). Now I know personally we spend slightly more than this – even with cost-saving strategies. So this might be a little hard, but it could work for your family

2. What does “30%” mean?

The goal with the 50/30/20 budget is also to spend no more than 30% of your net income on wants. Here is where you have a little freedom. Just know that this category can also bust your budget. 

In my opinion, 30% is pretty generous. You’re able to enjoy the fruits of your hard work, which is important to avoid frugal burnout. Examples of “wants” can include:

• miscellaneous shopping
• entertainment and recreation
• eating out
• subscription services
• gym memberships

3. What is the “20%” category?

What’s the best feature about the 50/30/20 budgeting rule of money???

Basically, if you can keep your needs and wants within the allowed percentages, you will almost always have money left for savings and debt repayment – 20% of your after-tax income to be specific.

Use this 20% to increase your emergency fund, build a sinking funds account, save additional cash for retirement, or increase your debt payments.

Remember, your “needs” category only takes into account minimum debt payments. And unfortunately, only paying your minimum means it’ll take longer to pay down what you owe. If you add a little extra to your debt payments, you’ll get rid of your balances quicker.

But while this budget covers all the bases, it might be unrealistic for you at the moment.

Once you run the numbers you might find that you’re spending way more than 50% of your after-tax income on needs – which limits how much you can spend in the other categories. And if so, this isn’t something you can change overnight.

So while this formula is an excellent guide, you must tailor it to where you are today. For example, let’s say you’re currently spending 70% on needs. In this case, you really can’t afford to spend 30% on wants – you wouldn’t have anything left to save.

You’ll need to tweak it to your situation. For example, spend 70% on needs, 20% on wants, and 10% on savings and debt repayment; or maybe 10% on wants and 20% on savings and debt repayment.

Or if you’re spending 80% on needs, you might spend 15% on wants and 5% on savings and debt repayment.

No matter where you are, make sure saving money remains a priority. THIS IS HOW YOU’RE ABLE TO GET OUT OF DEBT AND EVENTUALLY SPEND NO MORE THAN 50% ON NEEDS.