Budgeting is essential for anyone who wants to become financially stable. No matter your personal income, creating a budget will help you secure long-term financial well-being and make it much easier to achieve your life goals.
Most people are well aware that creating a budget is very important. However, things are less clear regarding what type of budgeting will be best for you. If you ask ten different financial planners about how to budget, you’ll likely get ten different answers. And to make things even more challenging, some of the most frequently recommended budgeting strategies are rather complicated, making it much harder to actually implement them into your everyday life.
Luckily, there are still quite a few budgeting strategies that are remarkably straightforward. Among them is the classic 50-30-20 budget, which can be helpful for people across all income levels and lifestyles.
In this guide, we will discuss the most important things to know about the 50-30-20 budget, including some actual examples. By taking the time to understand how this important budgeting strategy works, you’ll be able to decide if using it is right for you.
What is the 50 30 20 Budget?
The 50 30 20 Budget is one of the simplest budgeting models you’ll find. It was initially popularized by Elizabeth Warren (the current senator from Massachusetts) and Amelia Warren Tyagi and expanded upon in Warren’s book All Your Worth: The Ultimate Lifetime Money Plan.
Essentially, this budgeting model divides your after-tax income into three categories: needs, wants, and savings.
According to the plan, 50 percent of your income should be spent on your basic living expenses. The expenses include your rent or mortgage, utilities (gas, electricity, water, internet, etc.), transportation costs, insurance, and other “must-haves” that you need to pay for every month. The needs also include debt payments, such as student debt, credit card debt, etc.
Next, up to 30 percent of your income can be spent on your wants and lifestyle choices. The wants can include things like new clothes, entertainment, dining out, vacations, and other things you desire in your life but don’t necessarily need. Of course, you don’t have to spend the full 30 percent on these things. Putting aside some extra savings or investing might be a better option. But if you are spending more than 30 percent of your after-tax income on these things, you will run into financial problems.
Finally, you will want to distribute the remaining 20 percent of your after-tax income on savings. Building consistent saving habits early on will help make it much easier to achieve long-term financial goals, such as buying a home or preparing for retirement.
This budgeting model is extremely simplified, which can be both good and bad. There will be some things in your life that don’t fall neatly into one category or another. For example, a new refrigerator might not be something you’d categorize as a living expense, but at the same time, you need a fridge, so it’s not exactly a pure “want” either.
Nevertheless, this innovative system has helped many people organize their finances. Below, we will discuss how a 50 30 20 monthly budget might actually break down.
50 30 20 Budget Examples
Suppose that your salary is $60,000 per year. After you account for federal, state, municipal, and other taxes, you’ll around have $46,000 remaining. This means that you will be taking home about $3,800 per month (obviously, these numbers can vary).
If 50 percent of your budget is going to your monthly expenses, that means you can spend about $1,900 per month on all expenses. So, if your rent is $1,000 per month, utility payments are $300 per month, groceries are $300 per month, and car payments are $200 per month, that means you’ll be spending $1,800 per month on the absolute necessities, giving you $100 to spare. Sticking to these numbers will not always be easy, and if you live in a high cost of living area like New York City or San Francisco, you’ll probably find even it to be more challenging. Nevertheless, this is how the budgeting system works.
Regarding the next category, personal wants, 30 percent of your $3,800 take-home salary will give you just under $1,150 to spend. This means that you’ll be able to spend about $287 per week on things that you want, whatever that might be. If you are hoping to go on a vacation, then you’ll probably want to spend less than this in the weeks (or even months) leading up to it. Still, one of the nice things about this budget is that it gives you a little bit of wiggle room to have some fun.
Finally, you should save the remaining 20 percent of your take-home pay, in this case about $760. While this number might not seem like very much to anyone who is holding five or even six figures of debt, over the year, you will have saved, invested, or paid off nearly $10,000. That’s a pretty big deal!
Who Should Use the 50 30 20 Budget?
The 50 30 20 budget can be a foundational budget for just about anyone. The most important lesson to learn from this budgeting model is that all three categories—needs, wants, and savings—should be incorporated into your monthly spending plan. However, this exact model will probably be most beneficial for relatively younger people renting and living in an urban area.
Of course, there is no “budgeting police” who is going to make sure you are following your original plan to the letter. If your current monthly expenses are higher—perhaps you are supporting a family or living in an area with high living costs—you can certainly modify this system and distribute more of your income to pay for living expenses. Just don’t forget to pay attention to the other categories, as well.
Pros of Using the 50 30 20 Budget
The most obvious reason to use this budgeting model is that it is incredibly straightforward and gives you a great place to get started. People are often turned off by using a massive excel spreadsheet that allocates 1.34 percent of their budget for their electric bills, etc. And when people are unable to understand how their personal budget works, they’ll become much less likely to pay attention to their budget at all—and that is often where long-term financial problems tend to begin.
Additionally, people like this budget because it forces them to think about every component of their financial life. Obviously, you need to be paying your monthly bills. But it would be best if you also consider the things you want to enjoy (wants and lifestyle choices) and your long-term financial goals for the future (achieved through savings and debt relief). So, overall, it creates a good mix of wants and needs without being too indulgent or neglectful of any particular area.
Cons of the 50 30 20 Budget
Of course, a budgeting system that is this simple will also have its fair share of drawbacks. You may have rolled your eyes when we previously suggested the idea of paying $1,000 per month on rent (New Yorkers, we are talking to you). And if you have a family, the idea of spending just $300 per month on groceries might also seem unmanageable. There are plenty of situations in which you might need to adjust how much you put toward each category, and that’s okay.
Some people might also argue that this budgeting model neglects other important areas, such as investing. Investing is different from saving because while investing occurs through the purchase of assets, saving typically refers to the accumulation of cash. Investing is especially important if your employer offers a 401(k) plan and is willing to match your contributions. Remember, while the 50 30 20 model is quite useful for many, it’s not gospel. When choosing a budgeting strategy, you should always consider your personal situation and goals.
The Bottom Line: You Need a Monthly Budget
Regardless of whether you choose to use the 50 30 20 system or not, there is no denying that creating a budget is incredibly important. Even the Elon Musks and Warren Buffetts of the world create monthly budgets and try their best to stick with them (in fact, Warren Buffett has consistently credited budgeting for helping him get to where he is today). No matter what system you end up using, be sure you know how much you are earning and how much you are spending. By becoming just a bit more money-conscious, even your most ambitious financial goals will be easier to achieve.