27-Nov

The 50/20/30 budget is a proportional “how-to” that can help you stay-the-course with your financial goals.

The internet isn’t short on “budgeting tips”, but what sounds good and what works can be totally different things. Having a balanced budget is something that sounds great in theory, but unless we’ve been given the proper budgeting tools, we can take years learning it the hard way, or, like some, never at all.

The 50 20 30 Budget 

The 50/20/30 budget is a proportional “how-to” that can help you stay-the-course with your financial goals.

It’s a simple plan, which perhaps is why it’s so popular. Its common-sense nature will make it easy to remember and to start with and is an excellent foundation for your financial knowledge moving forward.

The key to this specific division of your income is that it allows you to have a sound budget without much effort.

1. Start by determining your net income

That is, post-tax. What do you “clear” every month? Once you’ve determined that, break out a piece of paper and a calculator and let’s get started.

2. Calculate your budget for Necessities, Financial Goals, and Wants

Each of the numbers in the budgeting rule stands for something.

  • 50% towards your needs,
  • 20% towards your financial goals,
  • and 30% towards your wants.

50% of your income = essentials

Essentials are absolute necessities for survival such as food, clothing, housing, minimum debt payments (such as credit card minimums, alimony, student loans) utility bills & transportation costs. 50% may seem like a lot, and it is, but the necessities do take up the majority of everyone’s budget, whether they earn $2000 a month or $8000 a month.

20% of your income = financial goals

Take 20% of your income and put it toward your financial goals. These goals can be emergency funds, investments, retirement savings, general savings, or paying off debt. This allocation should only be paid when your necessities are paid off for the month.

30% of your income = wants

Anything that is considered not a need, such as dining out, entertainment, vacations, etc. An important note about this category; if you want to pay off your debt sooner, there’s nothing saying you can’t adjust 10%, 15% or even 25% to the financial goals category to do so. In fact, if you’re comfortable with it, that may be the better route, when it comes to high-interest debt. Why? The sooner your debt is gone, the sooner that interest is also gone, which means more money in your pocket. You can always adjust it back again later when your goals have been met.

To demonstrate, here’s an example of how to implement the 50-20-30 budget, using 3 brackets of income:

You Earn…Necessities (50%)Financial Goals (20%)Wants (30%)
$4,000.00$2,000$800$1,200
$3,000.00$1,500$600$900
$2,000.00$1,000$400$600

The rule can (and will) change over time

For some people, the necessities percentage may be much higher than 50%, maybe because they live in a big city and the cost of living is enormous. That said, you can utilize the same idea and perhaps adjust to 70/20/10, or 70/10/20. The idea is that you can still achieve your financial goals and get some flexibility in your spending on what you want, without taking away from the necessities.

For some people, there may be more desire to change the financial goals percentage by taking away some from the ‘wants’ percentage – and that’s fine! The bottom line to the methodology is to create a balanced budget that reflects what is the most important thing is to you. For some, that may be getting rid of pesky, high-interest credit card debt (so, more in the financial goals category). For others, it may be the ability to go out every Saturday night for dinner with friends or family without taking it out of the grocery budget. Whatever it is for your lifestyle that feels balanced, this budget will help you get there.

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