Budgets are not usually held in high esteem. For most, budgets feel restrictive, require hours upon hours of organizing receipts, and are generally unsustainable. Instead of accounting for every dollar, set up a framework that keeps spending in balance. Once your money is in balance, you can stop worrying about it and managing your money becomes automatic.
The 50/20/30 formula for budgeting is a way to look at only three broad areas instead of juggling various, specific categories.
Starting with your net income (your income after taxes), balance spending between just three categories:
- 50% will go toward your needs,
- 20% will go toward your savings, and
- 30% will go toward your wants.
50% – Fixed Expenses (Needs)
No more than 50% of your spending should be on the essentials in your budget. These include the things you must pay no matter what. For example: a place to live, utilities, medical care, insurance, transportation, and minimum payments on any legal obligations (i.e. car payments, child support, etc.).
To determine if it is a need, answer these three questions.
- If you lost your job, would you keep spending money on this?
- Could you live without this purchase for six months?
- Could you live in safety and dignity without this expense?
20% – Financial Obligations (Savings)
At least 20% or more of your income should be going toward your financial obligations. The “savings” category actually includes two kinds of money – past and future. In this category, you will tackle paying off your credit cards, medical debt, car loans, mortgage, and other debts.
Along with your debt repayment, this category is also where you will save for the future. This includes establishing your emergency savings, saving for retirement, and saving for other financial goals.
30% – Personal Choices (Wants)
Once your needs and savings are established, you may consider your wants. You deserve some space where you can relax and enjoy yourself. Pinching pennies is unsustainable in the long-term, so once you have your needs and your savings in balance you can spend your “wants” money without guilt. The key is to stay within 30% of your income.
Examples often include: cable, internet and phone plans, charitable giving, childcare, entertainment, gym fees, hobbies, pets, personal care, restaurants, movies, shopping and other miscellaneous expenses.
The 50/20/30 formula is a good goal to target, and every step you take to move closer to this balance is a victory. If you have questions or need help, visit some of the resources provided in the box above.
When you know your budget is balanced, your money worries will begin to fade away. The realization that your obligations are met and it is okay to spend a certain amount on fun stuff will prevent the added stress of continually asking, “Can I really afford this?” Using the 50/20/30 Formula can help you relax and enjoy your money.
|Here are a few ideas to help move your budget closer to the 50/20/30 ideal:|
This article was first published in the Winter 2016 edition of the Retiring Right newsletter. Click here to view other newsletters. Not receiving your newsletter, update your address by completing the Change of Address form.