First off, let me say that if you are here reading about the 50-30-20 budget method then you are already standing head and shoulders above most of your peers: you’re actually trying to budget your income!
This method is just one of the most popular versions of any kind of percentage allocation budget system. What does that mean in English? Don’t worry, it just means that you take your monthly income and break it down into chunks to decide how much you can spend in any one category.
How does the 50-30-20 break down in the 50-30-20 Budget?
50-30-20 means that we will break your income down into three different main categories that will include 50%, 30%, and 20% of your total dollars.
These groups are:
- 50% – Absolute necessities
- 30% – Lifestyle Choices
- 20% – Savings/Investment/Debt Payments
Before I get into the different categories I would like to point out that these are just guidelines. You may feel as though a certain item belongs somewhere else – and that’s great – the point is that you are being intentional with your money and making choices that will be bringing you closer to financial freedom. If you have a family of four and rarely eat out then groceries could be considered a necessity. If you are single and eat out all the time then it might be considered a lifestyle choice because you need to prioritize cooking at home more often rather than eating out in order to control your budget.
In budgeting as well as finance as a whole there truly are no “one-size-fits-all” buckets that we can place ourselves into. Make your own decisions as you read through my recommendations.
The Absolute Necessities – 50%
Although a lot of people these days might consider their iPhone a necessity, for this budgeting style we need to define necessities as anything that you must pay in order to maintain the basics of living. We’re not talking about your iPhone: think Rent!
This category will include things like:
- Food (or not?)
There is always some room for interpretation and I also include some non-negotiable fixed costs in this category, like student loans, because if I don’t pay them it’s going to be a serious problem. I can always take my car back to the dealership if I can’t make the payment, but I have no intention of defaulting on student loan debt!
Saving/Investments/Debt Repayment – 20%
Who saves 20% of their income??? Crazy right??? Well, the sad truth is that most Americans save nowhere near this amount.
But you aren’t here to be a normal American, are you? No.
If you are reading this then you have hopefully made or are about to make a decision that can change the rest of your life. You want to make a decision to get out of the rat race and move on with your life.
Enter: 20% savings.
Dramatic motivation aside, what fits into this category?
- 401k contributions
- HSA contributions
- Roth IRA contributions
- Taxable brokerage account contributions
- Emergency fund
- Extra payments on your credit card
- Vacation fund
There are obvious choices on this list like your retirement accounts, but there is nothing that says you can’t save for a new car or a sweet vacation for your family. I would advise that you are tackling debt as your number one priority, but that choice is up to you. Speaking as a father of two young girls I can honestly say that the choice between paying off debt and taking them to Disney World is a tough one. You have to balance your financial needs with the need for making dreams come true. Some things in life have a ticking timer and I’m pretty sure my girls won’t be as captivated by a life-size Cinderella when they are 30.
The Lifestyle Choices – 30%
Ah, lifestyle choices. This is really such a vague and unhelpful name for a category, but one good thing about it is that it if you take a moment to seriously think about what belongs here and what doesn’t you’ll often glean some insight into how you are spending your money.
Good examples of lifestyle choice expenses include:
- Cell Phone (there is a difference between a flip-phone and an iPhone! – what do you “need”?)
- Cable TV/Internet (again, what is necessary vs what do you “want” to have)
- Clothing (other than mandatory work-wear)
- Entertainment (movies, shows, concerts, etc)
- Restaurants (are you using them as an experience or a replacement for cooking?)
- Gym Fees
The list here could go on and on because everyone is different and has different priorities. The key point is that if you aren’t able to fully fund your necessities and long-term goals then you should be making some sacrifices in this area. That doesn’t mean you have to live a completely boring life, but there are trade-offs that can be made for everything.
A couple of personal examples of a trade offs that I’ve made for my family are:
- Getting rid of cable
- Switching to a low-cost cell service
- Closing an activity center account that we rarely use to focus on the local gym
Again, the list can go on and on. What is important to you? Is it more important to you to have 300 channels (I bet you don’t watch 20 of them) or put money towards your kids’ college funds? That question could sound a little dramatic, but the point is valid.
The 50-30-20 Budget Method Wrap-Up
The 50-30-20 budget is just a tool. An idea. In order to be successful using any tool you need to have the right mindset to use it and learn from it. If you are not honest with yourself about how to judge your spending then you won’t be successful with anything.
Also remember that these percentages and items are just guidelines. Figure out for yourself what works best for you. The single most important aspect of this budgeting method is that you are using at least 20% of your income to go towards savings, investment, and debt repayment. If you can accomplish that, then the other 80% does not have to be too complicated.
I wish you luck on your journey and hope that you were able to find something helpful here! If you are interested in checking out other budgeting methods then check out my article on the Zero Sum Budget Method.
What method do you use? Where have you found success? Let us know in the comments!