There are many budgeting methods to try when you decide to get your finances in order. One of the most popular is known as the 50/30/20 method. Although this budgeting theory has been around for years, it has seen a recent insurgence in popularity. The following is a breakdown of how you can implement the 50/20/30 budget and determine whether it is a good option for you:
What is the 50/30/20 Budget?
In the simplest form, the 50/30/20 budget is a way to divide or allocate your take home, after tax income, into three separate categories. They are outlined as follows:
- 50% of your income or budget goes toward your necessities. What you need to live. This will include clothing, transportation, utilities, food and shelter. It should also include making at least your minimum payments on all outstanding debts.
- 20% of your budget should be put towards extra payments on debts as well as long-term savings. This category can also include any contributions you make to your IRA or a 401K. In short, the 20% category will include any of your financial priorities such as long-term savings. It does not include short term savings or saving for vacations.
- 30% of your income will include your lifestyle choices. For example, cell phone plans, eating out, hobbies, gym fees, entertainment and vacations all fall into this category. This is in essence the things in life you want, but don’t absolutely “need.”
A more concise breakdown of the method is 50% of your money is spent on necessities, 20% goes to debt payments and long-term savings and 30% for your non-necessities or lifestyle choices.
This Budgeting Rule Demands a New Way of Thinking
The representation of these percentages within your actual budget will often require a shift in your way of thinking. While the 20% long-term saving’s category might seem innocuous on paper, it can feel very different in real life. Most Americans just don’t save that much as a general rule. In fact, a Bankrate.com survey asked 1,000 adults how much of their income they save. Of those surveyed, an astounding 16% saved more than 15% of their current income. Therefore, it’s safe to assume most Americans simply aren’t saving anywhere near the 20% recommended by this budgeting method. Therefore, to make this change requires you to begin focusing more at your future needs and less on your immediate wants in terms of where and how your money is spent. For example, vacations are only possible, after money has been set back for savings. If something has to go, it’s the fun category, the “want” items not the need. Long-term savings and debt repayment become a priority instead of an afterthought.
Financial Freedom is The End Result of Following The 50/20/30
If you make the changes necessary to implement the 50/20/30 budgeting method, you will gain financial freedom as it will ensure you will have ample savings for the future and no debt hindering your lifestyle in the present. You will have to determine for yourself if you are ready to make the decision to embrace the budget fully.