Budgeting 101: The 50/30/20 Budget
The 50/30/20 Budget, Should you use it?
Not a fan of giving every single dollar a name? Don’t like using cash?
No worries! There are different ways of effectively budgeting your money without having to do a lot of math or having to carry a bunch of cash around.
Behold! The 50/30/20 Budget
What’s a 50/30/20 Budget?
Never heard of this budget strategy? Me neither, at least not until recently.
Basically, the 50/30/20 Budget takes your money and divides it up into three basic categories, thus making the budget process a lot easier. Each category is viewed as a total percentage of your monthly income. Instead of assigning every dollar a name and having to zero out each month, you just focus on these three categories.
So, How Does It Work?
As previously mentioned, this is a fairly simple budgeting strategy to use.
Here’s how it works.
First, you’ll start by finding your total income for the month.
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Second, you’ll take your total monthly income and divide that in half. The first half will be dedicated to the 50% category. In this section, you’ll focus this money on needs and obligations. This would include things such as food, transportation, utilities, minimum debt payments, and other basic needs to live. This category shouldn’t include entertainment or savings. Those will be applied in another category.
Next, you’ll take the remaining 50% of your money and divide that into two categories, 30% and 20%. The 30% category is the “Want” category. As you can probably tell, this category goes towards things you want to have, but aren’t absolutely necessary. This would be things like a new car, guitar, clothes, and entertainment. Everyone needs some “Play” money and this is your “Play” money category. Be careful not to overspend in this category.
The last category is the 20%. This category goes towards saving and debt. As you can tell, this category is all about putting more money towards your debts and saving for retirement. I would highly recommend putting at least 12–15% of this towards retirement savings and then put the leftover money towards debt payments. Most financial advisors and finance gurus recommend putting away 12–15% of your gross income towards retirement. You’ll want to make this a priority in your budget as well.
Pros and Cons
So, we’ve talked about how to set up and use this system. Let’s talk about the pros and cons of it. By understanding these, you’ll know for yourself if this system will work for you or not.
Pros
A major pro to this budgeting strategy is that every dollar doesn’t have to have a name. It just needs to be assigned to one of the three categories, 50, 30, or 20. Once it gets assigned to a category, you can have it do anything you want. Another pro, it keeps your budget simple. This budget gives you more control over your money, not your money controlling you. Finally, it helps you learn where your money is going each month.
Cons
As well, there are a couple of cons that you should consider. For example, this budget doesn’t take into account your current situation. Not all of us are in the same situation, some of us have more debt than others. Some of us have to support more than ourselves and our families. Also, it doesn’t prioritize debt repayment. Sure, that is a part of the budget, but it’s kind of put to the side. So, this budgeting strategy may not be good for those of us who have an overwhelming amount of debt. Finally, it can be hard sometimes to determine the difference between needs and wants. It’s not always as clear as it should be.
Conclusion
So, we’ve talked about the basics of this system, how to set it up, and the pros and cons. Now, It’s up to you to decide whether this system will work for you or not. As you consider the pros and cons, you’ll know for yourself whether this budgeting system will work for you. Good Luck!
