50/30/20 Budget Explained
The first step toward being a more financially conscious individual is really knowing where your money goes. The best way to do this? A budget of course! This blog post is going to completely outline the 50/30/20 budget for beginners and help you get insight into whether or not this budgeting technique could be for you!
Do you ever find yourself wondering how much of your income you should be spending on a certain item in your budget? Where exactly does that item fall in the grand plan of financial freedom? The 50/30/20 budget takes most of the guesswork out of it for you. Awesome right?
So what exactly is the 50/30/20 budget?
The 50/30/20 budget divides your monthly income into 3 very distinct categories. The 3 numbers represent different percentages of your income that should be allotted to these 3 different areas in your life!
The 50% represents your essential expenses.
The 30% represents your personal choices.
The 20% represents your financial priorities.
We’ll dig a little deeper into what exactly goes into these 3 categories in a minute. But first, let’s talk about why this works.
Why use the 50/30/20 budget?
Most people have no idea where their money goes each month. They turn things they don’t need into “essentials” and justify every single cent they spend. The majority of people who are in serious debt have never even tried to follow a budget and could easily get out of debt if they focused on something like the 50/30/20 rule.
Just having a budget isn’t going to get you any closer to your financial goals. In order for your budget to actually get you anywhere, you need to have a goal bigger than that. Having a goal is the only thing that’s going to keep you motivated.
Think about what your financial goals are before you even start budgeting because, without a goal, you will fail.
The 50/30/20 budget will help you understand your finances and get closer to these goals!
Alright, you ready to really learn what it is? Let’s dig in. Ps. There will be an example of how to use this budget on a $5000/month income.
50% Essential Expenses
50% of your income is going towards your essential expenses. What exactly are your essential expenses? Only things you need in order to survive and to make money.
Many people try and sneak their phone bill into this category. For most of us, a phone is a luxury, not a necessity.
Now when some people talk about this budget they include transportation costs in the personal choices category; however, I feel that having a car that has gas in it is a necessity to be able to get to work. This is why I include gas and insurance in this category.
30% Personal Choices
This is the category where you get to have some fun money. Any money you spend that isn’t considered an essential expense is going to go into this category.
- Cell Phone Bill
- Eating Out
Any money left in this 30% at the end of the month either goes toward paying down debt in addition to what you do in the 20% section or goes toward your savings. It does not roll over.
20% financial priorities
This category is where you financial goals really come into play. Are you trying to finish off your student loans this year? Are you trying to retire with a million dollars in the bank? Whatever your goals are, this is where you get to work toward them.
- Kids’ College
- Emergency Fund
Make sense? It’s a really easy budgeting tool to be able to follow. Now let’s go into an example so you can see the plan in action.
Bob and Mary are a 30-year-old couple with a combined monthly income of $5,000 after taxes.
50% = $2,500
30% = $1,500
30% = $1,000
Let’s dig a little deeper.
50% Essential Expenses
Mortgage/Rent = $1,250
Utilities = $250
Food = $300
Transporation = $600
Clothing = $100
30% Personal Choices
Phones = $200
Cable = $100
Hobbies = $200
Eating Out = $200
Entertainment = $200
Variable = $600 * covers other choices & remainder goes toward financial goals
20% Financial Priorities
Debt = $500
Emergency Fund = $200
Retirement = $300
This plan can work, it may be tight but it’ll work if you stick to it. Take a few minutes and write down all of your financial goals for the next 5, 10, 15, 20 years. Make your plan based on what you want.
you got this.
If you try out the 50/30/20 plan or have used it in the past, let me know what you think in the comments below.