New To Budgeting? Try the 50/30/20 Method
One of the hardest parts about sticking to a budget is that it feels so restrictive. For many of us, being on a budget feels like being on a diet, but instead of sitting there while everyone else orders dessert, you’re painting your own toenails on a Friday night because you’re not “allowed” to get your monthly pedi.
I definitely used to feel this way. I took my first corporate job after college for a salary of $40,000 + bonus. When tax season rolled around, I saw that I ended up making $77,000 my first year. Pretty good, right? BUT I was still living paycheck to paycheck and had no idea where my money was going. I had literally nothing to show for it.
I knew something had to change, but the thought of budgeting seemed like I’d be doing nothing but working my life away for money I couldn’t even spend.
What’s the point of that?!
There’s no point to working every day to not be able to spend our hard earned money on things we want. Budgeting is actually about understanding what you have to work with so you can have and do all of the things you actually want!
No matter how you’re approaching budgeting, the one rule for making a budget is that it must be sustainable. There’s many different formats for budgets out there, and today I’m going to share with you a great one for beginners, called the 50/30/20 budget.
What is the 50/30/20 Method?
If you think of your total monthly income as a pie chart (yummm 😋 oh wait, not that kind of pie), the 50/30/20 method breaks down your monthly income into three categories: needs, wants, and savings.
50% of that pie chart goes to needs
30% goes to wants
20% goes to savings/debt
Necessities:
You should be shooting to spend UP TO 50% of your income on necessities. Think things like mortgage/rent, insurance, groceries, utilities, cell phone bill and all of the other not so fun stuff that takes up a huge portion of our paychecks.
Notice that I said you should be spending UP TO 50% of your monthly budget on necessities. If you find that you’re spending over 50% of your income in this category, you may want to assess if there are any areas to downgrade some of your expenses. Like you need a phone in this day and age, but do you need the latest Apple iPhone? Probs not.
Wants/Discretionary Spending:
This is the stuff we actually want to be spending our money on.
Sometimes it’s hard to differentiate between wants and needs, but try to be honest with yourself.
For example, the pure ✨JOY✨ I get in the morning from my daily $7 Starbucks warm half decaf cappuccino with almond milk and hazelnut is unmatched.
I know I won’t die without it, but it’s a small pleasure that brings me a lot of joy!
If I need to, I will cut something else out of the budget to make it happen. I’m allowed to spend this chunk of money on anything I want to, with the key take away being that I keep the spending within the allocated money I’ve set aside for discretionary spending.
Considering needs vs wants can be more serious than a cup of coffee though. Something that could be on the line of a want vs need would be a car.
Do you NEED a car where you live? Let’s say for you it’s yes, it’s a necessity. BUT…do you NEED a car that costs $800/month?
Probably not.
Remember: we can have anything we want, we just can’t have it all. At least not right now.🙂
Savings/Debt:
This one should be pretty self-explanatory, but friend, you need savings. Shoot for 20% of your monthly income to go to saving/investing and high-interest debt.
This is the part of making your budget where you really have to establish some clearly defined goals. If you have a bunch of debt, then 20% going toward debt / savings may not be enough. You may need to lower those necessities and wants allocations. Get clear on what you want your money to do. You’re about to make some major money moves, so you have to know what you want to work toward.
This may be establishing an emergency fund (do this first!), or save for an upcoming larger purchase. Or maybe both of those are taken care of and you are ready to start investing so you open a Roth IRA!
It’s going to be different for everyone. The goal with this portion of the budget is to protect future you, so decide what that needs to look like for you right now. As you get better at this budgeting thing, your income increases, you build up a healthy emergency fund and pay off your high-interest debt, the focus of this 20% of your income may shift, and that’s amazing!
Finding the Sweet Spot:
Finding your numbers out of whack? Maybe then it’s time to take a peek at what you can change.
Maybe it’s just small changes like going out to eat or ordering in less frequently or at least more mindfully.
Maybe it’s something larger like downgrading your current vehicle or even getting a roommate.
To do this exercise, I do not recommend guessing. I find that people tend to underestimate in a lot of categories. I recommend taking your last 3 to 6 months of expenses and averaging them out to find your real spend.
Example of 50/30/20 Budget
Okay, so let’s look at an example of the 50/30/20 budget in action.
For this example, let’s assume our girl, Mandy, is bringing home $3,500 a month after taxes. Mandy is as Webbie and Lil’ Boosie would say I-N-D-E-P-E-N-D-E-N-T. You know the one…
She got her own house, got her own car, two jobs, work, hard…
Anyway….Mandy lives alone with her dog and doesn’t support anyone but she and her fur babe.
Mandy’s budget would look like this:
Necessities 50%=$1,750
For Mandy this includes:
Rent
Car payment
Insurance
Groceries (including dog food and treats because Mandy is a good dog mom)
Cell phone
Utilities including internet
Wants 30%= $1,050
Mandy knows she can have anything she wants, but not everything she wants right now, so she spends her discretionary budget on things that bring the most value to her life like:
Happy hour with friends
Monthly IV hydration (she loves to be hydrated)
Peacock subscription (because what is life without The Office?)
CorePower Yoga membership
Savings 20%= $700
Mandy’s got her emergency fund on lock and thanks to her smart budgeting she’s already paid off her high-interest credit card. She’s got her minimum payment due on her student loans (those are a low interest rate though, so she isn’t rushing to pay them off), but otherwise that’s all the debt.
She knows not to hoard cash, so she opts to move half of her savings budget into her high-yield savings account for some short term goals like travel and holidays and invests the other half in her Roth IRA account.
50/30/20 Budget for Beginners
The 50/30/20 budget is great for beginners because it’s so simple. If you’ve been successfully following a budget for a while, you might find that this approach isn’t for you, and that’s okay!
Take a Look at What Makes the 50/30/20 Budget Beginner-Friendly:
Less to think about: Because there are only three categories, you don’t have to drive yourself crazy tracking every last cent. Once you divvy up your budget you know exactly how much you have to spend for each category.
Easy to follow: This is an easy to follow template perfect for people new to living with a budget.
If after a few months you need to make some adjustments or even move to a different budgeting method, you’ll have established what works for you and what doesn’t.
Flexible and adaptable: You can always swap out things as needed. For example, if you’re not using that Peloton subscription and want to cancel it so you can spend that money on date night every month instead, you don’t have to completely rewrite the budget to make it work for your life.
If you’d rather move 10% of your discretionary spending to savings, knock yourself out. It doesn’t have to be stupid rigid.
Prioritizes your spending: Knowing what you can and cannot afford is a game changer.
How Do I Know if the 50/30/20 Budget Is Right for Me?
Everyone’s personal finance circumstances are different, so what works for one person may not work for another.
That’s a pretty annoying answer, I hear you. You really just have to know yourself, your financial goals, and your spending habits.
The 50/30/20 budget may work for you if:
You want a super simple approach to budgeting
You don’t need to constantly check in on your budget and track every dollar
You have a fairly simple financial situation and financial goals
You can be really honest with yourself about your needs v. wants
You receive predictable, consistent paychecks
You could benefit from the “quick win” of sticking with a budget for a whole month
One of your main financial goals includes: paying down debt, building up savings, investing for the future
Wrapping Up
Ultimately, you probably won’t know if the 50/30/20 is the method for you until you try it. Don’t be afraid to set a budget and experiment to see what works and what doesn’t, but no matter what, you cannot give up on your budget!
The thing is - you won’t know what is driving your spend without a budget. A budget does not have to be restrictive and it does not have to involve neurotically analyzing your numbers every month. Laying the groundwork now and then just checking in for 15 minutes a month can do wonders.
If you’re looking for even more budgeting methods and tips on how to manage debt and credit, check out this course where I go over everything you need to know to get your money together. I’ve even included easy to use workbooks you literally just plug your income and outgoing expenses into and voila! A done for you budget.
