In order to receive the most benefit from personal budgeting, you need to make it a habit. That means regularly tracking your income and expenses to make sure your money’s going where it’s needed.
But building that habit isn’t always easy — especially if you’re not a math person or are unaccustomed to staring at long columns of numbers. Even if those numbers represent money you’ve either earned or spent, they can be a little intimidating to the non-accountants among us.
That’s what makes 50/30/20 budgeting a good place to start. It offers a simple, high-level overview of your finances that doesn’t require getting into the minutiae of your data, making it much easier to dip into than, say, a line-item budget.
With this type of budget, you separate your monthly income into three categories: needs, wants and savings. These are typically broken into percentages of 50% for needs, 30% for wants and 20% for savings.
The main advantage of 50/30/20 is that it’s less detailed (and easier on the eyes), and its big-picture view can help you more easily consider your financial priorities.
Right off the bat, you know that 20% of your monthly income will go to some form of savings or debt reduction — that could include investments, high-interest credit card payments, retirement savings or even an emergency fund. That’s part of what makes this method particularly good for getting out of debt. Having those funds withdrawn or transferred automatically (something we highly recommend) can help make it even easier.
Distinguishing needs from wants should also be fairly easy. After all, needs include all those things that keep you from seeking shelter in a tree: housing, food, clothing, utilities, transportation, insurance, etc. In other words, everything that’s essential for you to work and live.
Wants, on the other hand, include inessential expenses for things like entertainment, leisure travel, gifts and eating out. But making a proper distinction can become tricky. For instance, is eating out truly a want if working late won’t allow you time to prepare a meal?
And what about that gym membership? Or those new designer shoes? Yes, technically the shoes are clothing and are necessary for walking around, but do they need to be imported from Italy and look so cute under disco lights? Or does an upcoming job interview make them essential after all? Such gray areas can make it difficult to categorize accordingly, so take some time to think about how they apply to your individual situation.
The 50/30/20 budget can prove extremely flexible — able to be adjusted according to changing priorities, income and lifestyle. For instance, if you have some extra income or are planning a large future purchase, you can adjust the formula to emphasize saving (40/20/40). Or maybe your income has grown erratic and you don’t have enough for wants or savings, so an 80/10/10 split is needed until the storm clouds clear.
While this type of budget has the advantage of being great for beginners and those who don’t like to obsess over details, the lack of detail can be less helpful when trying to identify problem areas. For example, by not having more specific guidelines, you might find yourself overspending (especially in the want category). That may necessitate tracking your expenditures more closely in order to keep the percentages where you want them.
Overall, 50/30/20 budgeting is a tried-and-true method for getting yourself acquainted with the habits and mindset necessary to keep spending on track while keeping a careful eye on the future.