50% Goes To Your Needs

Half of your after-tax income should go to things that are essential, or for a lack of a better term “needs”. Things in this category are expenses that you need in order to survive and have a stable lifestyle. Some of these include:

• Housing: Rent or mortgage payments, property taxes

• Food: Groceries and home supplies that you need

• Transportation: The necessary costs for getting to and from work like car payments or public transportation passes/tickets

• Utilities: Electricity, water, gas, heating, and cooling

• Insurance: Health, life, and auto insurance are essential for protecting what matters most

30% Dedicated For You Wants

The great thing about the 50-30-20 budget rule is that 30% of your budget is dedicated to your wants, things that are desirable to you. They may not be crucial for survival but they contribute to you having a more enjoyable life. It’s important to not overspend in this category since it’s the one that’s most easiest to splurge in. Things that are included here are:

• Dining: Eating out at restaurants and food delivery

• Travel: Any sort of trip, vacation, and weekend getaways done for pleasure

• Non-essential shopping: Luxurious gifts for yourself and loved ones, decorations for your home and for the holidays

• Entertainment: Monthly subscriptions, movies, bowling nights

• Hobbies: Golfing on the weekend, sporting lessons (tennis)

• Personal grooming services: Haircuts, massages, personal training, manicure and pedicures

20% Towards Savings and Debt Repayments

Being financially sound isn’t just about managing your expenses, it’s also about reducing any liability and building security. With that said, the last 20% (or more if you have it) of your budget should be dedicated towards savings, any investments and debt you need to pay off. Some examples of each include: 

• Savings: Short-term savings goals or for emergency funds

• Debt Repayment: Any payments on debts you have, whether it’s minimum payments or extra so you can pay them off quicker. (Student loans or credit cards)

• Investing: For long-term growth and future planning (contributing to retirement accounts like 401k)

Putting the 50-30-20 Budget Rule To Use

Being able to put this budget to work doesn’t require too many steps. The first thing you’ll need to do is figure out what your after-tax income is each month. If you bring home $3,500 a month after taxes, using the 50-30-20 budget rule would have your money divided as so:

-$1,750 is put towards your needs (50%)

-$1,050 can be used towards your wants. Things like nights out, buying a new phone, etc (30%)

-$700 is for savings and debt payments. Make your money work for you and grow your bank account  (20%)

Whether you’re looking to save money fast or looking to make a big time purchase, managing your budget will require commitment. It’s okay if maybe one month you overspend in the wants category, just don’t make it a habit.

Why Use A 50-30-20 Budget

Deciding to go with the 50-30-20 budget rule comes with a handful of benefits, making it a preferred budget strategy.

Balanced Approach: Your budget is divided into three straightforward categories, making it easy to know where your money is going each month. This will allow you to build for the future while you enjoy the present.

Focus on Your Financial Goals: With 20 percent of your income going to your investments, the 50-30-20 money rule allows you to keep track of your investments and savings. 

Prioritizes Your Expenses: This budgeting method prioritizes your money so that you can take care of what needs to get taken care of first. Then you have your play money as well as money towards savings and investments.

Reduce Financial Stress: Incorporating any sort of budget into your life is going to ease the anxiety that comes with finances. You won’t have to second guess yourself on how much you’ll need to put towards certain categories. 

Improve Your Financial Health: Following the 50-30-20 budget rule consistently will lead to better financial health since you’ll be paying off debts consistently.

Downsides of the 50-30-20 Budget

The 50-30-20 budget rule seems good and dandy but does come with its downsides. These are just a few of them:

Too Heavily Focused on Wants

When following this budget in particular, just about one third of your income goes to things that you want. While that might seem nice at first, these things are necessary in the grand scheme of things. 

We’re not saying that keeping money to spend on yourself is a bad thing, but 30% might be a bit of a stretch. Allocating more of your money to the needs or investing category could benefit you in the long run.

No Changes To The Budget

Making and sticking to a budget requires a lot of determination and drive to follow through on it. Unless there are emergency situations, which some of your budget already accounts for, you should make sure that the proper percentages of your income are going towards their respective categories. 

The downside to that is that you’re putting the same amount of money into each category. What we mean is that there’s no percentage change based on your status. A fresh out of college student who probably has significant debts to pay and a 75 year retired millionaire will both be putting the same percentage into the 50-30-20 buckets.

How To Prepare For A 50/30/20 Budget

Just like with any budget, you need to take a few things into consideration before you start crunching the numbers and having your budget work for you.

The first thing you’ll need to do is calculate how much money you’re bringing in at the end of each month after taxes. This will help you know how much money you’ll have to work with. Next, take a look at the transactions you’ve made the last few months to fully understand how much money you’ve been spending. 

For each of your expenses, assign them to their proper category whether it’s a need or a want. This gives you a better idea of how your money will be spent moving forward. It’s important to be honest with these expenses and not miscategorize them to fulfill your satisfaction.

Next, you should create your budget and start to streamline some of the process to make it easier for you. Using a budgeting app like Hiatus will help you create these customized budgets so that you can stay on track easier. Tracking your spending is essential here since you want to make sure you’re not overspending in particular categories and going over budget.

Is the 50/30/20 Budget Rule Right For You

When it comes to your personal finances, there’s not a one size fits all solution. While this budgeting method could be great for one person, it might not be the answer for another. With that being said, it is important to stay on top of your finances and a budget is a great way to do so.