50/30/20 Budgeting
Could a 50/30/20 budget help you stay on track with your finances?
What is 50/30/20 budgeting?
50/30/20 budgeting is a basic guideline for how to manage your budget.
It goes like this:
Necessities
50% of your take home salary (after taxes) goes towards necessities.
Necessities are things that you need to live your life. Think: food, water, shelter, clothing. Without a necessity you will suffer serious consequences.
These are things like:
Rent/mortgage
Groceries
Utility bills
Medications
Necessities can also be bills that, left unpaid, can cause you serious financial problems with your bank, credit score, or leave you in a financially vulnerable position.
For example:
Health insurance
Car payments
Car insurance
Gas
Student loan payments
Discretionary spending
Next, 30% of your take home pay goes towards discretionary spending.
Think of discretionary spending like “fun money”. It’s not something you need (and be honest with yourself here) but it’s something you like, love, want or enjoy.
These are things like:
Streaming services
Gym memberships
Travel
Shopping
Dinner out with friends
A new phone
Concert tickets
Anything else that is not needed for BASIC SURVIVAL
Savings
Finally, 20% of your take home pay is for savings. This includes short-term and long-term savings goals.
For example:
Retirement savings in a 401k
IRA
Emergency savings
Vacation savings
Any other money you put into savings accounts or investment accounts
How to use the 50/30/20 rule
Elizabeth makes $5,000/month (after taxes). Here’s how her 50/30/20 budget breaks down:
Elizabeth uses 50/30/20 budgeting to set goals for her spending and savings.
Elizabeth spends $2,500 on her rent, utilities, groceries, healthcare, car payment, car insurance and other necessities.
She spends $1,500 on her gym membership, new clothes, going to Happy Hour with friends every Thursday, and a weekend away every couple of months.
She saves $1,000 per month in her savings. She puts $400 into her 401k at work, $200 into her Roth IRA, $100 into an emergency fund, and $300 into a travel fund.
When Elizabeth gets a raise at work, she adjusts her 50/30/20 numbers to accommodate her increased income.
But what if my spending doesn’t fit into the 50/30/20 rule?
Now, it’s important to remember that the 50/30/20 rule isn’t really a rule. À la Pirates of the Caribbean: it’s more of a guideline than an actual rule.
Your finances may look very different, depending on your stage of life.
If you’re 22, broke, and living in NYC, you might be spending 90% of your income on necessities, 10% on discretionary and saving 0%. That’s ok (for now). Live your life and enjoy the Big Apple.
If you’re 30 and saving for a big wedding, you might be spending 50% on necessities, 10% on discretionary and saving 40% to plan the most amazing wedding ever. That’s great too.
But whatever your life situation, the 50/30/20 rule is a good rule of thumb to get you started.
If one of your categories is waaaaay out of line with the 50/30/20 rule - you need to ask yourself why.
If your needs are 95% of your income - why?
Is there something that you thought was a need that really isn’t?
Do you really want to live your life with only 5% to spend on discretionary (not to mention savings)?
Are you willing to make a major change in your lifestyle to allow room for more pleasure spending in your life?
This dynamic could also swing the other way.
If you’re spending 50% on your needs, 5% on your discretionary and saving 45% of your salary - why?
Is there something specific that you’re saving for? Like a house, blow-out vacation, wedding or other major life event?
Or are you saving all your money because it feels like “the right thing to do”?
What would it feel like if you allowed yourself to be more flexible with your discretionary spending?
Saving money is great, but there has to be a point to your savings. Piling money higher and higher in a savings account with no plan to use it is a wasted opportunity to use your money to do something amazing in your life.
Can you think of some way you could spend more in your discretionary budget that would add more enjoyment or pleasure into your life?
Final Thoughts
If you have no idea where to start with a budget, start with the 50/30/20 rule. How do your personal expenses align?
If your expenses vary drastically from the 50/30/20 rule - why? Do you know the reason?
Is this a temporary change (like increasing your savings for 1 year to buy a house) or something long-term that you will need to change (like spending 95% of your income on your mortgage)?
The 50/30/20 rule helps you find balance with your finances so you can find the harmony between your necessary expenses, your pleasurable discretionary expenses, and your savings for the future.
Action Items
Figure out your take-home pay (after taxes). If you’re not sure how your paycheck breaks down after healthcare, retirement, etc. check your most recent pay stub or ask your HR department.
Use your take home pay and multiply it by x 0.50 (50% necessities), x 0.30 (30% discretionary) and x 0.20 (20% savings). Write down the three numbers.
Do an audit of your last 3 months of expenses. The easiest way is to check your credit card statements & checking accounts you use for paying bills.
How do your spending and saving numbers align with the 50/30/20 rule? Are there any categories that are dramatically different? If so, do you know why? Try to align your spending and savings as close to the 50/30/20 rule as possible to have the proper balance of spending for living expenses, fun and saving for the future.
Your life may not be perfect, but it is imperfectly yours. The only way to live it is your way.
