The first step toward being a more financially conscious person is really knowing where your money goes. What’s the best way to do this? A budget, of course! Budgeting is one of the best things you can do to save yourself money and set yourself up for financial success and I really think the 50/30/20 budget is a great option for everybody.
Have you ever found yourself wondering how much of your income you should be spending on a certain item in your budget? Where does each specific item fall in the grand scheme of building financial freedom? Man, money is confusing.
I know it can all get pretty darn complicated, but the 50/30/20 budget can really take some of the guesswork out of it for you so let’s dig in to how it works and get your money on track.
Why Should You Budget?
So many people don’t have the slightest idea where their money is going each month. These same people also turn a ton of their random wants into their “essentials” and manage to justify every single penny they spend.
The hard truth is, most people who are in serious debt have never had a budget because they don’t take their money seriously. Every person out there could easily get closer to being debt free if they used something like the 50/30/20 budget to shove them in the right direction.
Before you start budgeting, you need to know what your bigger purpose is. What are you trying to work towards? The only way to continue to stay motivated to reach your financial goals is to focus on your why.
What could your motivator be?
You could be trying to get out of debt, save for a house, pay for your kid’s college, or just save for a vacation. When you have a serious goal in mind your budget will go a lot smoother.
- Related: 5 Reasons Why You Need a Budget
Basics of the 50/30/20 Budget
The 50/30/20 budget divides your monthly income into three separate categories. These categories all have different percentages of your income associated with them that should be given to each part of your finances!
The budget essentially tells you how much money you should be putting towards your expenses, choices, and priorities. Don’t worry, we’ll keep digging in to these categories so you can get a better understanding of how it works.
50/30/20 Budget Categories
#1 – 50% Essential Expenses
The 50/30/20 budget puts 50% of your monthly income straight towards the things you can’t live without. These includes things like your mortgage/rent, utilities (heat, water, electricity), food, and transportation.
*Many finance bloggers will sneak a cell phone bill into this category. Personally, I believe having an expensive cell phone is a choice. People lived without them for hundreds of years!
These things are all necessary for you to stay alive. You need a roof over your head that has running water/electricity, you need food, and you need to get to work to pay for it all!
#2 – 30% Personal Choices
This category is where you get to have some fun money. Woo! Any money you spend that isn’t considered an essential expensive is going to go into this category. This could include your phone bill, cable/netflix, hobbies, clothing, eating out, drinking, and gift giving!
Any money that isn’t spent by the end of the month gets transferred into the 20% category to help you reach your financial goals. This money does not roll over into the next month’s personal choices, don’t make that mistake!
#3 – 20% Financial Priorities
This is arguably the most important category in your budget. This is the category where your personal financial goals are going to come into play. What are you personal goals? Here are some examples:
You can either choose to devote the entire 20% to one category of financial priorities or you can further divide the 20% into the different sections of your priorities.
50/20/30 Budget in Action
My favourite thing to do for budgeting type posts is to give an example of a realistic couple/family budget that can show you exactly how this works. So, we’re going to work with a couple named Dan and Serena (yes, I’m watching gossip girl in the background while writing this post, don’t judge me).
Dan and Serena are a 30-year old couple with a combined total monthly income of $5,000 after taxes. They aren’t very fancy (unlike the real Dan & Serena) and don’t need a ton of money to cover their lives.
With a $5,000 income, their budgeting categories look like this:
- Essential Expenses (50%): $2,500
- Personal Choices (30%): $1,500
- Financial Priorities (20%): $1,000
50% Essential Expenses ($2,500)
Dan and Serena have the follow essential expenses that add up to $2,500 a month.
- Mortgage: $1,250
- Utilities: $250
- Groceries: $400
- Transportation: $600
30% Personal Choices ($1,500)
The personal choices of Dan and Serena are as follows:
- Phone Bills: $200
- Netflix & Cable: $100
- Dan’s Soccer League: $50
- Serena’s Weekly Paint Class: $150
- Bi-Weekly Date Nights: $200
- Other Entertainment: $200
- Miscellaneous: $600
- remaining of the miscellaneous category rolls over at the end of each month to their financial priorities!
20% Financial Priorities ($1,000)
Currently, Dan and Serena’s only debt is their student loans, so they’re pretty lucky. They prioritize their finances in the following ways:
- Student Loans: $500
- Emergency Fund: $200
- Retirement: $300
When their student loans are paid off at the end of the year, they’re going to start investing more heavily in their retirement funds to get to the recommended 15% of income towards retirement!
One of my favourite quotes is “failure to plan, is planning to fail” and it applies so heavily to budgeting. If you make a plan for your money it makes it so much easier to succeed! This budgeting technique can work for you if you focus hard and remember your why.
If you try out the 50/30/20 budget, or have used it in the past, let me know what you think about it in the comments below!