With a 50/20/30 budget, you take your income and simply divide it up into chunks of 50%, 20%, and 30%. The 50% chunk goes toward needs, the 30% chunk goes toward wants, and the 20% chunk goes toward savings. The nice thing about this type of budget is that it is a quick and simple method to use. Let’s look at an example of how this budget would work.
Say you earn $3,000 a month of take-home pay each month (after taxes and deductions). With the 50/20/30 budget, you would multiply that $3,000 by each percentage to get the amount of money to allocate to each category. This means that $1,500 would go toward needs, $600 would go toward savings, and $900 would go toward wants.
What Expenses are Included in Each Category?
Having only three categories means that each category is fairly large and covers a range of expenses. Everyone’s breakdown of expenses will look a little bit different, but here is an example of what one might look like.
|Needs (50% of Income)||Savings (20% of Income)||Wants (30% of Income)|
|Mortgage or Rent |
Who Should Use a 50/20/30 Budget?
As I said in my last blog, the zero-based budget is my personal favorite. This one doesn’t rank as high in my mind, but there are some good things that the 50/20/30 budget has to offer. The 50/20/30 budget is good for people who:
- Do not have any non-mortgage debt.
- Have a fully funded emergency fund.
- Have had success with budgeting in the past.
- Want something quick and easy and don’t want to dedicate a lot of time and energy to tracking monthly expenses and balancing the budget.
- Have a good handle on their spending habits and are able to live below their means.
Maybe you have done a zero-based budget (or something similar) in the past with success, but now you are tired of spending all of the time and energy that it takes to do that type of budget each month. If that’s the case, then this budget would be a good fit for you. Or, maybe you’ve never budgeted but you have no debt and you know for certain that you are living well below your means. If that’s the case, then this budget would be a good fit for you as well. If neither of these scenarios fit your situation, perhaps it would be a wise idea for you to start with a zero-based budget first, then move on to a 50/20/30 budget later on down the road.
The Down-Side of a 50/20/30 Budget
While this budget might work for some, there are some cons that you should be aware of before attempting it.
- It is easy to overspend as there is little to no expense tracking.
- It can be difficult to track progress toward any financial goals you might have.
- The priority structure of this budget can make it difficult for you to set yourself up for financial success in the future.
- Only putting 20% toward savings might not be enough to cover all of your savings’ goals.
Personally, I have problems with the whole structure of a 50/20/30 budget. The concept of “Survive Today – Prepare for Tomorrow – Have Fun” is to prioritize the allocation of your income in that order. The first priority is to allocate enough money out of your income to cover your needs. The second priority is to allocate enough money to make sure you are adequately prepared for tomorrow with your savings. The third and final priority is to allocate some money to have fun with. This is in contrast with the priorities of the 50/20/30 budget because there is a larger chunk of money being dedicated to having fun than to saving and preparing for tomorrow. I would have less of a problem with it if the order was 50/30/20 with 30% going toward savings and 20% going toward having fun.
Only putting 20% of your income aside to cover all of your savings’ goals might not be enough. Now, this will obviously depend on your monthly income and what savings goals you have. Let’s use $3,000 of monthly income for an example. If you are wanting to save to buy a house in two years, buy a car with cash in one and a half years, and invest so that you can retire in 10 years, then 20% of that $3,000 ($600) will likely not be enough to fully fund all of those goals. On the other hand, if you make $10,000 a month and are not saving to buy a house and have 20 years to save for retirement, 20% of your income ($2,000) might be enough to fully fund your goals.
Another issue that I have with this type of budget is that it is very general and doesn’t have a good, built-in way to track your spending each month or the progress you are making toward your financial goals. Unless you track your spending and progress outside of your 50/20/30 budget, it will be difficult to know where you might be overspending and how much progress you are making toward your financial goals.
Overall, the 50/20/30 budget might be a good fit for you if you don’t have any debt and already have good spending habits and are able to live below your means. If the sum of your monthly expenses is significantly lower than your monthly income, then you would probably do well with a 50/20/30 budget. Otherwise, you might want to consider a different budget type to start with.
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