How to Budget Using the 50/20/30 RuleApril 24, 2017
One of the first steps to financial success is learning how to budget and sticking with it. Setting up a budget provides visibility and control over personal finances, allowing individuals to track how much they are spending and where and helping them avoid frivolous spending by staying within set limits. However, traditional budgets are not for everyone and for young professionals at the beginning of their financial journeys or business owners and freelancers who might have irregular incomes, sticking to a complex budget may be difficult. Fortunately, there is a different approach to budgeting that is more flexible and easy to use — the 50/20/30 budget.
This budgeting system is perfect for people who think they are “bad” at budgeting because it does not require meticulous record-keeping or maintenance. Instead, it is simple and less stringent, and can really work where traditional budgets have failed. The 50/20/30 budget works on a percentage system, with 50 percent of total income going toward paying fixed expenses, 20 percent is allocated to savings or other financial goals, and the remaining 30 percent is flexible spending money. Let us break it down a little further:
50% – Fixed Expenses/Essentials
Instead of allocating money into dozens of different categories as one would in a traditional budget, a 50/20/30 budget only has three categories. The first, and largest, is fixed expenses or essentials. These expenses are the things that take precedence over all other expenses, as they are the things you cannot live without. These include rent or mortgage payments, insurance, utilities, auto or education loan payments, and anything else you consider essential.
Groceries are essential expenses as you cannot live without food, but because buying groceries is a variable and not a fixed expense, it can fall under the essentials category or the 30 percent flexible spending category — this is completely up to you.
20% – Savings/Financial Goals
Remember the financial goals you set last month? This is where they will go. Money that goes to this category is for saving or investing. Whether you are saving to build an emergency fund, putting back money for retirement, or trying to pay off your student loans or credit card debt faster, 20 percent of your take home pay should be allocated to this category.
30% – Discretionary Spending
Here is the fun part — the remaining 30 percent of your income is for flexible or “lifestyle” spending. These are things that are not necessarily needed, including travel, clothing, eating out, entertainment, gifts, and anything else on which you enjoy spending money. This percentage is intended to make life fun; however, if you find yourself needing to cut back on spending, this category should be the first to go.
The Perfect Budget for People Who Need Flexibility
One of the greatest benefits of the 50/20/30 system is flexibility. If you are at a time in your life when you want to achieve a financial goal, such as buying a home or paying down debt faster, you can adjust the percentages you allocate to each category. For example, if you total the costs of your fixed expenses and they equal 53 percent of your total income, you can adjust your discretionary spending category to equal 27 percent each month. It is all about what works for you and your particular financial situation. If you are notoriously “bad at budgeting,” and you have only tried traditional methods, this may be the right method for you.
Which budgeting method works best for you?