No two budgets are created equal. Every household needs to focus on creating a budget that takes into consideration their unique income and expenses, their financial goals and their lifestyle dreams. Plus, budgets shift over time as needs and wants change, so a household’s budget might look different from how it was a few months prior.
Still, there are some common budgeting styles that guide beginners in budget creation. One of the most popular is the 50/30/20 budget — but what is this budget and why does it work as a jumping-off point for so many in personal finance? Read on to find out.
The 50/30/20 budget isn’t difficult to understand, which is why it is such a popular beginner budget. Simply put, the budget divides a person’s (or household’s) after-tax income into three categories: needs, wants and savings.
It is important to note that the 50/30/20 budget is best for those with roughly average income. Because needs do not increase or decrease in cost based on income level, those with high or low income won’t be able to adhere to the budget without being remarkably wasteful. What’s more, the budget doesn’t take into account high-interest debt, like credit card debt, personal loans or some auto loans. Personal finance gurus strongly suggest using a different budget to aggressively pay down such debt as allowing these debts to retain a balance will continue to cripple attempts at financial stability and liberation into the future.
Finally, a person (or household) doesn’t have to adhere to the 50/30/20 budget to benefit from it. Some personal finance gurus advocate using the budget as a benchmark, to better understand spending and saving habits. Others suggest occasionally fitting expenses into these categories to determine whether someone has enough income for a larger purchase, like a new car or a house. Budget planning in this way can be beneficial occasionally, even if a budget doesn’t guide spending and saving decisions over a longer period.
Without further ado, here is the nitty gritty of the 50/30/20 budget:
50 Percent Toward Needs
The first stated rule of the 50/30/20 budget is that 50 percent of after-tax income should be spent on “needs.” Different households will have different necessary expenses, but it is important not to confuse needs with wants. Needs are the bare necessities of life, the things a person or family cannot survive without. Some examples of common needs include:
- Housing, like rent or mortgage payments
- Transportation, like bus or train tickets or else licensing, registration, insurance, fuel and maintenance costs for a car
- Utilities, like electricity, water, sewer, trash, gas and even internet and cellphone service
- Insurance, particularly health and life insurance
- Childcare, like daycare costs or expenses for children’s school and wellness
- Basic clothing, like that which is necessary for warmth, hygiene and professionalism
30 Percent Toward Wants
Next, the 50/30/20 budget allows a full 30 percent of income to be devoted to “wants.” All budgets should allow some amount of funding to “fun stuff,” and this budget is notably generous in this category. Thirty percent of income is a sizeable chunk to be used on things like:
- Date nights
- Restaurants and takeout, which should be occasional, unlike food from groceries
- Entertainment, to include activities like concerts, sporting events, theatrical performances and more
- Gym memberships
- Premium and streaming television services
- Hobbies, especially if hobbies are particularly expensive, like golf or ceramics
- Non-essential shopping, for things like designer clothing, decorative home goods and the like
20 Percent Toward Savings
The final number of the 50/30/20 budget reveals that 20 percent of income should go to savings. There are a few different savings efforts that every household must participate in, and fulfilling these mandatory savings goals might take up all 20 percent of income for some time. However, eventually accounts for things like emergency savings will be appropriately full, and budgeters can focus their 20 percent on more interesting savings goals, like travel funds, college savings, saving for a home down payment and the like. Then again, it might be prudent to devote some of this money for savings to paying down low-interest debts, like student loans or mortgages.
There isn’t much complexity to the 50/30/20 budget, which is why it is so approachable and so widely used. It is easy to tinker with the basic formula to create a budget plan that works perfectly for individual income, goals and habits.