There are a lot of different ways to budget your money, but one method has been around for so long that people refer to it only by its numbers.
The “50/30/20” method of budgeting is popular because it’s so simple. It works like this:
You use half (or 50%) of your after-tax income for your needs, such as housing, groceries, utilities and insurance. Use 30% for your wants (like dining out, shopping and entertainment). Use 20% for savings and debt repayment, including loans and credit card debt.
Once you have those numbers figured out, you simply categorize your expenditures. Buying coffee grounds at the grocery store to make coffee at home is a “need,” but that afternoon Starbucks run is probably a “want.”
This system is easy to track, which makes it great for people who are just getting started with budgeting, or people who are too busy to micromanage their spending. In addition, unlike stricter methods, it allows room for enjoyment (that’s the wants category), and it carves out room for savings, too.
But just like any other budget system, it has a few drawbacks. For one thing, people may struggle with this method where the cost of living, or COL, is high. If you live in a high COL area, you might need to adjust to 60/20/20 to allow for your higher rent or mortgage payment.
In addition, your income level will matter a lot. If you have a lower income, your needs might eat up more of your budget. On the other end, people with higher incomes may be able to use more than 20% for the “save” category.
But even if you have to make these adjustments in the size of your three categories, the categorization method is the same!
How to Get Started
Getting started with this method is easy!
The first step is to go back over your last three months of expenses, and list out the totals you spent on your housing and utilities, car payments, groceries, insurance, clothes, eating out and more. Once you have that total number, start categorizing each expenditure as a “need,” “want” or a “savings/debt payment.”
After you’ve put your expenses into those categories, add up how much you spent in each category.
Next, add up all of your income (from all sources) over the past three months, and determine what percentage of your after-tax income went into those three categories.
Here’s an example based on $5,000/month in after-tax income:
|
Needs - 50% |
Wants - 30 % | Save & Pay Debt - 20% |
|---|---|---|
| $2,500 per month | $1,500 per month | $1,000 per month |
| Rent, utilites, groceries, insurance, car payment | Dining out, shopping, entertainment, subscriptions | Emergency fund, retirement, credit cards, loans |
Over three months, that’s $7,500 on needs, $4,500 on wants, and $3,000 toward savings and debt payments.
If you spent more than 30% on “wants,” you should look at that category first and see what steps you can take to reduce it.
You can also take a look at “needs” to see if there are ways you can reduce those expenses, by trying to reduce spending on groceries or calling your cell phone and Internet companies to ask for better deals.
If you’re still above 50% on your needs, maybe that’s ok if you can reduce your wants to compensate for your high rent. Or, you can consider picking up a side-gig or doing something else to increase your income.
If you need help budgeting — even if this method isn't going to work for you — you’re welcome to reach out to us! We work with all types of personalities on developing budgets and tracking systems that work for them. We’d love to talk to you about how you can develop a budget that’s sustainable for you, and talk to you about saving, investing, raising your credit score and more.
Remember: We’re here for you, for life (and all of its many, varied stages). We look forward to connecting with you soon!
Schedule a free consultation with a Certified Financial Counselor.
