What do meal prep, Instagram schedule apps, and getting a gym buddy all have in common?
They’re systems that help you organize your life and simplify your schedule.
Rather than stress about what’s for dinner every night of the week (and probably wind up eating cereal again), meal prep allows you to plan your weekly dinners in advance. Same thing with your Instagram apps and your gym buddy. They all provide structure to your life.
What is the 50/30/20 budget? It’s a system designed specifically for your money.
Here’s how it gets broken down:
- 50% of your money goes toward your needs: rent, health insurance, and student loan debt.
- 30% goes toward your wants: dinners out, concerts, and vacation.
- 20% goes toward your savings: retirement accounts, emergency funds, and any other goals you’re saving for.
The 50/30/20 budget is helpful for those who feel confused by figuring out how much money to allocate to different areas in their lives, or those who find themselves coming up short on savings each month.
Just like your gym buddy who motivates you to work out, this system of budgeting helps ensure that you cover your financial bases. Giving every dollar in your budget a job makes budgeting easier.
How to create your 50/30/20 budget.
Let’s say your take-home income each month is $3,000 after taxes.
Using the 50/30/20 budget, you have $1,500 for your needs, $900 for your wants, and $600 for your savings each month.
This percentage-based system is designed to guide your spending. Understanding that you have $1,500 for your rent, groceries, health insurance, student loans, and gas helps you plan for important decisions, like which part of town you can afford to live in.
You might be wondering how you differentiate between a need and a want. Is gas really a ‘need’ or is it a ‘want,’ if a bus route runs one block away from your house?
Everyone’s budget is unique. You are in total control of your money.
If there is a bus stop one block away and taking the bus to work two days a week will save you $50 a month in gas, you could choose to allocate that to making an extra loan payment instead of putting it toward your gas budget.
Your ‘wants’ can be identified as the things that would be nice to have but that you can live without.
Dinner out on Friday with your partner is always a good time, but your life won’t break down if you don’t visit your favorite restaurant each week.
Savings can be sorted into everything from your automatically deducted 401k contributions to monthly payments for a new car.
This style of budgeting is accessible because it is so simple. By following the percentages, you give every dollar you earn a job to do.
Because the 50/30/20 budgeting rule allows for wants and for savings, it doesn’t feel restrictive to most people.
Habits for Financial Stability
Of course, your money situation is subject to change throughout the year, and definitely over the course of many years. As your income increases, you don’t necessarily need to keep spending 50% of your budget on needs. Sticking to that percentage could easily cause lifestyle inflation, in which you spend more as you earn more.
If you get a raise but are comfortable with your old budget, you can simply increase your savings percentage.
Allocating 20% of income for savings might also be too low for some people. If you spent the first part of your working life paying off debt or dealing with low income, you might want to allocate a larger percentage to saving or building an emergency fund until you have a strong financial cushion.
Ultimately, you can use the 50/30/20 budget as a guide to your finances.
It might make sense to change the percentages as your financial goals change—the 50/30/20 budget is a great place to start as you move toward a financially secure lifestyle.