What Is the 50/30/20 Budget?
When it comes to budgeting, there’s no one size fits all solution. We all have different incomes, desires, attitudes, and approaches to how we handle our finances.
How to Use the 50/30/20 Budget Method
The 50/30/20 budget or rule is recommendation to spend no more than 50% of your after-tax income (referred to just income for the rest of this post) on Needs (housing, food, etc.), no more than 30% of your income on wants (dining out, shopping), and the remaining 20% to be saved.
Step 1 – Define Your Needs (50%)
This category is for the essentials. Let me emphasize that word: essential.
Examples of needs can include:
Due to housing costs and other high-cost expenses being needs, they take up a bigger portion of your budget.
If you’re spending more than 50% on your needs consider downsizing to bring that number back to 50%.
Step 2 – Clarify What You Wants (30%)
While the 50/30/20 budget rule allows you more flexibility with your Wants spending (as long as it falls into the guidelines), it’s still important to determine your priorities to make sure you don’t overspend.
Things like entertainment, unlimited cell phone data, and the bulk of your clothing fall into the Wants category, not under your Needs.
Step 3 – Save for the Future (20%)
This category puts the focus on helping you improve your financial health.
Debt-reduction payments: This is for payments on your credit cards, student loans and any other debts that are above the minimum payment.
Why the 50/30/20 Budget Works
This method works well for those new to budgeting or put off by rigid spreadsheets.
When the 50/30/20 Budget Doesn’t Work
The main problem with this budgeting method is that, by itself, it doesn’t lend itself to planning or being intentional with your money.
For those that have struggled with their finances, taking control of your money requires a shift in mindset. This budget won’t provide that.
Let me know in the Comments below
Have you tried the 50/30/20 budget method? Did it work for you?
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