Make a budget — it’s the most repeated piece of financial advice out there today. But it isn’t an easy directive to follow if you don’t know how to make one.
Luckily, the 50-30-20 budget is one of the easiest ways to keep track of your spending. It’s great for beginners who aren’t sure where to start.
What is the 50-30-20 Rule?
US Senator Elizabeth Warner catapult the 50-30-20 budget to fame with her book, All Your Worth: The Ultimate Lifetime Money Plan. The method breaks down your after-tax income into three basic categories and, you guessed it, percentages.
- 50% for your needs
- 30% for your wants
- 20% for your savings
Are these caps a little tight? You can tweak these percentages to suit your circumstances. The point it to ensure you never spend more than 100% of your take-home pay.
Your needs represent all the expenses you absolutely must pay to lead a safe life—both physically and financially. They include the big things like rent or mortgage payments, utilities, groceries, and healthcare.
They also include the minimum payment on credit cards and lines of credit, as well as any scheduled payments on cash advances.
Your survival may not seem like it hinges on these debt payments but paying your credit cards and installment loans are important to your financial security.
Unlike payday loans, which are due back in one lump sum, installment loans involve several payments to clear your debts. For more information, check out MoneyKey to learn about how an installment loan works. The key takeaway is to budget for each payment for the entirety of your loan’s term, just like you would budget for rent.
Ideally, from your debt payments to your utilities and every essential in between, you should only spend 50% of your income on these needs. If you’re way off the mark, you might have to think about moving to a neighbourhood with cheaper rent or consolidating your mortgage.
While you work on these big moves, try restricting what you spend on other needs, like groceries and utilities.
The next category is all about the fun stuff. Your wants aren’t absolutely necessary for your safety or comfort. They’re usually splurges that make your life a little brighter.
They might include your six-step Korean skin care routine, your gourmet pizza subscription, or shared tapas with friends. But they also include your unlimited data plan or new (instead of used) clothes.
As you might guess, this category is the worst culprit for bloat.
To help you keep to the recommend 30% cap, sit down and track every unnecessary expense you make over three months. It’s the only way to see your mistakes, like how you’re signed up for not three, not four, but five tv streaming services.
Lastly, you’ll want to reserve 20% of your take-home pay for savings, split across at least three accounts:
- Retirement: Aim for $1 million in the bank.
- Emergency fund: Try to save three to six months of living expenses.
- Big purchases: Whatever you need to purchase a car, house, or weekend getaway.
This last step is what budgeting is all about. By setting aside some cash, you can prepare for all life’s biggest expenses — from a long-anticipated retirement date to an unexpected plumbing emergency.
And doesn’t that sound like a relief? Try out this budget out to control your spending and get back into the driver’s seat of your finances.