Now more than ever, people struggle to control their finances. Putting a strategy in place of managing your money can feel overwhelming, especially with competing financial priorities. But what if we told you there was a simple, effective way to organize your budget without getting lost in spreadsheets and the frustration of feeling trapped by overly restrictive requirements?
Follow along as we break down the 50/30/20 budgeting method, explain why it’s the option that really works, and show you how to implement it to start on the path toward a financial future you can enjoy!
This budgeting framework is designed to guide you in allocating your after-tax income efficiently and in a way that still allows you enjoy the life you’re working so hard to create.
50% of income is for needs: the essentials that you need to live, such as housing and food, are considered needs.
30% goes to your wants: this is all discretionary spending. If you buy it and you don’t need it to live, it will go in this category.
20% is allocated to savings and debt repayment: paying off high interest debt and creating an emergency fund will be your priority with this 20%.
If you’re a book reader, you can check out “All Your Worth: The Ultimate Lifetime Money Plan” by Senator Elizabeth Warren, who introduced this simple and adaptable method, which is friendly to all income levels and allows you to get back in control of your financial future.
The 50/30/20Rule is effective because it simplifies budget by removing all the complicated calculations and giving you three categories to track. By prioritizing your obligations and customizing the plan to your circumstances (like high debt balances or variable income), you will build a financial balance that allows you to enjoy life and even prepare for the future.
These non-negotiable expenses meet your core needs and keep your life running. This can include:
Rent or mortgage
Utilities: electricity, water, internet, air conditioning, heat, phone service
Transportation: gas, public transit, car payment, and insurance
Groceries (not meals out)
Health Insurance and other medical expenses
Life Insurance
If your needs category exceeds 50% of your income, it may be time for you to consider adjusting your lifestyle. Downsizing to a less expensive home that costs less per month than 30% of your after-tax income, shopping for better insurance rates, or finding ways to cut your utility costs are a few strategies for cutting back on these expenses.
Sometimes budgeting can feel really restrictive, leaving you wondering what you’re working so hard for. This category leaves room for those non – essentials you enjoy like:
Entertainment: movies, concerts, games, self-care activities like spa treatments or massages
Dining out & take out
Memberships: the gym, social clubs, digital apps or online groups, etc.
Shopping: clothes, shoes, cosmetics and toiletries
Subscriptions: Netflix, Hulu, Amazon Prime, Spotify, Apple Music
While it is essential to enjoy your life, tracking these expenses helps you to avoid lifestyle creep (we all know it’s a real thing!),when increased earnings start leading to excessive spending.
This portion of your income is dedicated to eliminating high interest debt and creating a foundation for long-term stability.
Emergency savings: Aim to have 3 – 6 months of savings in ahigh yield savings account.
Debt payoff plan: Use the debt avalanche method to start by prioritizing high interest debt.
Retirement contributions: 401K, IRA and other types of investments
Extra debt payments: any extra money you have leftover should be allocated to making payments toward your debts.
By prioritizing saving and paying off debt, you will have the peace of mind that each month you are prepared for unexpected expenses and taking steps in the right direction toward creating financial freedom.
Step #1 – Calculate your after-tax income: Determine your monthly income after taxes including salary, any earnings from a side hustle, investments, part-time job, or other source that comes in regularly.
Step #2 – Categorize your expenses: Review your last three months of spending and separate expenses into the categories according to the breakdown above. You may need to adjust some of the percentages to meet the needs of certain seasons of your life but make the goal 50/30/20.
Step #3 – Adjust spending habits: You may uncover a lot during this process. Take the time to do some reorganizing if needed. There maybe some subscriptions you aren’t using that you can cancel, you may be able to negotiate lower rates on some of your bills, fixed expenses or monthly debt payments, or you can automate your savings to prioritize meeting your financial goals.
Adjusting spending to make it make cents, always makes sense, whether you find yourself overspending or not.
Step #4 – Track your progress! You can use budgeting apps like Piere to help you monitor your spending and stay on track, or just a simple spreadsheet. Keep reading and we may have something at the end to help you here.
Starting a budget can be difficult, especially if you have an elevated debt load, irregular income, unexpected expenses or high-cost obligations. Do the best you can to stick to the plan with confidence that the sacrifices that you are making now are leading you to a solid financial future.
If you live in a high-cost housing market where safe and affordable housing requires more of your income, your housing expenses may exceed 50%. In that case, you'll need to reduce spending in the 30% category to balance your budget.
This simple and powerful money management tool will ensure you cover your necessities and enjoy your life.
Start budgeting smarter today and enjoy the peace of mind that comes with financial clarity. Download our 50/30/20 Budgeting worksheet to get started today!
