If you are new to budgeting, picking the right strategy can feel intimidating. Luckily, finding a budget you can commit to doesn’t have to be a headache!
While it does have it’s faults, the 50-20-30 budgeting method is straightforward and easy to follow. This method is much more beginner-friendly and less time-consuming than alternatives. Plus, it does not create strict rules that are hard to keep up with!
Keeping your finances in check is essential. The ability to confidently pay your expenses and build your savings account is key.
In this article, we will teach you how to follow the 50-20-30 method. Keep reading for helpful tips and tricks for boosting your budgeting skills!
What is the 50-20-30 Method?
The 50-20-30 method was first outlined by Senator Elizabeth Warren in her book All Your Worth: The Ultimate Lifetime Money Plan.
In All Your Worth, Warren states:
“Balancing your money is the key to having enough.”
Following this idea of balance, Warren divides money into three distinct categories:
- Your Must-Haves: All your essential needs such as rent, monthly bills, and groceries.
- Your Savings: Money put into a savings account or towards investments.
- Your Wants: Non-essential purchases – the “fun stuff” category.
Dividing your money into these categories allows you to know exactly how much you can spend on each.
This makes planning ahead much easier as a result. Eliminating financial stress ultimately helps you to stick to a budget long-term.
Who Should Use the 50-20-30 Method?
The design of the 50-20-30 method can work for anyone, but especially those new to budgeting.
Unlike alternative budgets, the creation of detailed spending categories is not required. This makes the method ideal for people with limited time or patience for budgeting!
The 50-20-30 method allows you to know exactly how much money you can spend on non-essential items. This freedom to spend on fun purchases helps prevent budgeting burnout.
Knowing where and how to allocate your funds is crucial. The 50-20-30 method helps teach you how to properly divide each paycheck.
Likewise, the method will help you if you have struggled with more complex methods. It will assist you in establishing better spending habits with greater ease!
How to Use the 50-20-30 Budgeting Method
When it comes to applying the 50-20-30 method, the rules are fairly simple.
They are as follows:
- Use 50 percent of your income for essential needs.
- Put 20 percent of your income towards savings.
- Spend 30 percent of your income on non-essential wants.
An important note is that these percentages are for remaining income after tax.
Without further ado, here is a more in-depth explanation of each of this method’s rules:
Use 50 Percent of Your Income for Essential Needs
You always want to allocate the largest portion of your budget for your essential needs. The 50-20-30 method commits 50 percent of your income per paycheck to these essentials.
This will include any regular monthly payments, such as:
- Car Payments
- Phone Bills
- Health and Automobile Insurance
- Loan payments
Your first step should be to write down every monthly expense you have. To do so, you will need to look at your transaction history or checkbook.
If you do not have proper documentation of your past spending, now is the time to start.
It is also important to note which necessities have set amounts versus which ones can vary.
For instance, your utility payments can fluctuate depending on how much you use per month. Comparatively, things like rent payments are more likely to have fixed amounts.
Different employers will provide pay-outs at different intervals. Regardless of if you receive a weekly, bi-weekly, or monthly paycheck, 50 percent of it should be set aside.
Having a secondary checking or savings account can be helpful. You can place your essential needs money into this secondary account. This way, you won’t end up spending this money on accident!
Save 20 Percent of Your Income
A critical component of any budget is allocating a percentage of your income to savings.
Savings accounts can serve many purposes, including:
- Creating an emergency fund
- Saving for a major purchase, such as a car or property
- Paying off debts, such as student loans
- Building an investment portfolio that adds value over time
When using the 50-20-30 method, 20 percent of your income should be set aside in a savings account.
The 50-20-30 method actually emphasizes saving money more than alternative budgets. In other methods, the percentage is closer to 10 percent.
This larger percentage allows you to build up your personal savings much quicker. If you are starting with little to no money in savings, this is crucial.
You always want to feel prepared in the face of emergencies. The more money you save, the more secure you will be. It will also help you plan better for major life changes in the future.
Spend 30 Percent of Your Income on Wants
Many budgets will advise against unnecessary spending. With the 50-20-30 method, spending is actually a key component.
The 50-20-30 method allows you to spend 30 percent of your income on whatever you want.
By doing so, you can avoid feeling burnt out or dissatisfied with your budget. After all, spending money on yourself is a form of self-care!
Knowing that you will have 30 percent of your income for personal spending can also help you plan ahead.
For example, let’s say you want to buy a new pair of shoes that cost $200.
Using the 50-20-30 method, you can determine how long it will take you to make that spending money. This allows you to save for personal and fun reasons, rather than just for emergencies.
The key with this rule is to actually spend the money. By allowing yourself more freedom in spending, saving money will seem less like a chore.
Plus, you will be less likely to go on an all-out shopaholic binge!
Benefits of Using the 50-20-30 Budgeting Method
As mentioned, the 50-20-30 method helps to make budgeting more beginner-friendly.
Creating a budget for the first time can be daunting. If it is your first time, you are likely worried about whether or not you are doing it right!
With this method, the process is much more approachable. This makes it easier for you to stick with it and improve your financial literacy.
Here are 5 key benefits of using the 50-20-30 budgeting model:
- Simple to Follow: This method does not require highly detailed categories or tracking. Similarly, it is not comprised of many different rules. Instead, there are 3 straightforward and easy-to-understand categories to place your money into. Plus, these categories use percentages that are easy to calculate!
- Allocates More for Saving: Saving money should be a priority within your budget plan. If you have just started, you may not have a large savings account yet. This method will help you to build up your savings in less time than alternatives.
- Builds Healthy Spending Habits: You don’t want to give in to every spending urge you experience. However, you also shouldn’t limit yourself entirely! The 50-20-30 method allows you to spend within your budget. This instills a healthier relationship between you and your money.
- Helps You Feel More Secure: Worrying about paying your bills can be a major stressor. With this method, you will begin to feel more secure immediately. This will help to build your financial confidence as well!
- Avoids Budget Burn Out: Forcing yourself to follow strict rules can be detrimental. The goal should be to establish a saving routine that you can stick to. The 50-20-30 method helps you set reasonable spending boundaries you can keep up with.
Adjusting the 50-20-30 Method for Your Needs
Not having harsh rules is one of the main benefits of the 50-20-30 method.
As a result, you should avoid confining yourself to these percentages too strictly.
Maybe you need more than 50 percent of your income for your essential needs. Maybe you need less! Every person’s financial needs are different.
Don’t be afraid to make adjustments that work for you. Your goal is to use this method as a framework for building better financial habits.
If you find a different balance that meets your needs better, use it! The 50-20-30 method is here to get you started and provide you with a solid foundation for budgeting.
As your confidence grows, you can adjust these numbers as needed!
Helpful Tips for Budgeting More Effectively
There is always room for improvement when it comes to budgeting.
The 50-20-30 method is only the starting point. From here, you should aim to find more ways to improve your spending habits!
Here are three helpful tips to budget more effectively:
1. Keep a Journal
Visually mapping out your budget can be insanely helpful.
Keeping a journal that outlines your budgets and expenses is key. It will assist you in learning how to budget more effectively.
In your journal, you can keep track of:
- Monthly expenses
- Upcoming appointments
- Future purchases
- Financial goals
- Changes to your income
This kind of documentation helps you be more mindful of money in your day-to-day life.
2. Minimize Expenses
Certain expenses, like rent, have fixed monthly payments. Other expenses may be more fluid depending on use!
Finding ways to minimize your fluctuating bills is vital! It will help you to reduce how much money you spend on your needs each month.
For practice, think of ways you can reduce your water bill. Using energy-efficient modes on your appliances is one example of how you could cut back!
As a result, you will have more money left over from the 50 percent rule. You can use this extra money to create a savings account for just your essentials. Think of it as a separate emergency fund for your bills!
3. Eliminate Unnecessary or Un-Used Subscriptions
There may be monthly subscriptions draining your account that you have forgotten! Taking an inventory of these and eliminating unnecessary monthly payments is essential.
These can include:
- Streaming services, such as Netflix, Hulu, or Spotify
- Ecommerce subscriptions, such as Amazon Prime
- Expired free-trial periods
- Subscriptions for apps on your phone
- Gaming subscriptions
- Gym memberships
Once you have created this list, comb through it to see which items you can do without.
For example, perhaps you subscribed to a photo editing program for a college class. After completing the class, you forgot to cancel the subscription!
Finding these services that are still charging your account is paramount. Canceling subscriptions you no longer use can help you save hundreds more per month.
Budgeting 101 for Millenials
Budgeting can be quite the headache – but it doesn’t have to be!
If you are new to creating budgets, using the 50-20-30 method can help. This method will teach you the basics of saving money and boost your financial awareness. However, the real truth of the matter is that any budget or method you pick will likely work if you adjust it to your personal circumstances, and stick to it long-term!
Written by Deborah Boyland, Head of Marketing at CPQi, the leading provider of digital transformation to the financial markets.