Budgeting requires discipline, and everyone budgets (or doesn’t) differently. Many budgets require designating a purpose to every dollar, or a lengthy list of every single expense you may or may not encounter during the month. Fortunately, there are other ways to keep track of your spending habits! Elizabeth Warren is behind the 50/30/20 Budgeting Rule which allows for a much more flexible month of spending.
The basic explanation of the 50/30/20 rule is that you put 50% of your income towards needs, 30% towards wants, and 20% towards savings. It is a simplified version of budgeting that takes less time, and less future planning than other budgeting techniques. Of course, this rule is a bit idealistic and works far better for individuals with a balanced financial situation. However, it is a great beginner’s budget as well as it teaches the difference between wants and needs as well as the importance of bulking up your savings account.
Calculate your income. How much do you make after taxes? If your paycheck varies, average the last two or three months (or as far back as you’d like). Don’t forget, only include your taxes in your number. Extra payroll deductions for insurance, retirement funds, garnished wages, etc should be put back onto your after-tax income.
Designate 50% for your needs. Necessities are things like food, shelter, transportation, child care, etc. Include your rent or mortgage, utilities, insurance (added back in from your payroll deduction), garnishes, gas money, and groceries. Anything you absolutely need to have covered in order to keep your electricity running, food on the table, and a roof over your head.
Designate 30% for your wants. Here’s the fun stuff (or the kinda-fun stuff). This category is obviously for things like shopping sprees, traveling, and eating out. But be sure to include things you may be missing like your Netflix subscription, memberships, hobbies, and could possibly even include your Internet connection at home. For some, that could be a necessity, while others can freely access Internet elsewhere.
Designate 20% to your savings. A savings account is by far your best asset when it comes to financial health. You can add back in any retirement funds deducted from your paycheck here. If you’re able, try to put up to 20% of your paycheck aside to accommodate for emergencies, big projects, or fancy vacations.
Remember, each person is unique. One person’s needs will not always match another’s. If you are unable to designate exactly 50/30/20 of your paycheck, always make sure your needs are covered first. Then, put as much as you’re capable of towards your savings account. What’s left belongs in the want category.
As I mentioned earlier, this budget is wonderful for young people trying out a budget for the first time. It’s also perfect for those with a healthy and established financial situation. Unfortunately, people who earn less than they spend may not be able to use this budget. It does not easily accommodate for credit card use and expects that a person does not need more than 50% of their paycheck for their needs. This isn’t always the case. For those with a paycheck that does not allow for this budget’s percentages to work may need to find a different budget entirely.
On the other hand, 50% of someone’s paycheck may well exceed the cost of their needs. Whether they are truly living well below their means or are perhaps getting their necessities covered by a parent, these people may need to find a different method of budgeting to fit their unique situations.
However, because this budget rule is made of percentages and is meant to be flexible, it’s plenty easy to change up the pattern. Need 80% of your paycheck for necessities? Put 10% towards both wants and savings. Are you only responsible for paying your phone bill? Put 75% of your paycheck into savings for when you move out on your own.
The bottom line is that the 50/30/20 budget is great for people who are looking for a more flexible budget that takes less time and allows for more freedom. It may not always work in every person’s situation, but the majority of people starting out with a brand new budget will find it easy to learn and easy to stick to.
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