Do you usually receive your monthly paycheck with good intentions to save a portion of it, only to find yourself four weeks later eating food from the back of the pantry and waiting desperately for payday to roll around? Or maybe you’re not much of a spendthrift but you’ve got school debt and you can’t figure out how much of your income you should be putting towards paying it off each month. Perhaps you’re interested in renting or buying a new place and you’re not sure what monthly rent you can afford based on your paycheck.
Regardless of your situation, many of us find ourselves at a loss to explain how the contents of our bank accounts seem to disappear by the month’s end. If you find yourself wondering just how much you should be spending each month, and more importantly on what, you may want to consider implementing the 50/20/30 budget. This financial framework can help you to better allocate your funds to create a more balanced spending-to-savings ratio.
The 50/20/30 Budget
The basic idea of the 50/20/30 budget is to divide your monthly income (after tax) into 3 buckets:
50: The first bucket represents your living necessities, which should be paid for with up to half of your monthly earnings (remember that’s after tax). Here we’re not talking about your personal “can’t live withouts” like an annual membership to your favorite spin class or your essential cell phone plan. These are the true, bare necessities, i.e. your rent, your utilities, your transport costs, and your groceries.
Other necessities that may not come to mind right away are health insurance, car insurance, prescription medications, minimum monthly credit card payments, minimum student loan payments, etc. A good rule of thumb for differentiating a necessity from a want is this: any payment that would severely impact your quality of life should be considered a necessity.
20: One-fifth of your income should go towards debt repayments and/or savings. You can also think of this 20% as money put towards your financial priorities. This includes things like retirement savings, creating an emergency fund, saving for a special vacation, or any extra payments towards your debt. For example, you’re marking your minimum student loan payment each month (which comes out of your first bucket), but you’d like to pay it off faster to avoid paying more interest over the years, you can put the money in this bucket towards that.
30: This leaves you with just under one-third of your income to pursue your lifestyle choices. Here is where all of those personal purchases like your phone bill, meals out, shopping, pet food, and your gym membership come in. While these less necessary purchases should be made after you have set aside money for your first two buckets, you should also not feel any guilt in spending your remaining 30%. You will have budgeted for these small luxuries, so enjoy them! That’s the beauty of this ratio, you can blissfully trade in this chunk of your income for things that make you happy, knowing you’ve done your due diligence by first putting aside money for those necessary bills.
How do I know if the 50/20/30 budget right for me?
While this is a great starting out point for those of us who feel a bit lost on how to parcel out our hard earned wages, it’s not a one size fits all framework. A starving artist in New York City would probably find it impossible to spend only 50% of their monthly income on necessities like rent, transport, and food. Someone else living in rural Oregon may have lower living costs, but they may be saving up for a big vacation and choose to slim their lifestyle choices bucket down to just 10%. Remember, these are guidelines for spending up to 50, 20, and 30 percent of your income within these buckets. It’s not a necessity to reach those numbers. See them as more of a maximum limit, with the intention of not superseding them.
Whether you decide to implement the 50/20/30 budget into your life or not, a great place to start is tracking each of your costs and see what your personal ratio looks like now. A strong awareness of your spending habits is a great beginning to organizing your funds and enjoying those days in-between payday, rather than surviving them.