50/30/20 Method Is Perfect if You’re on a Budget… but Still Have a Life
Budgets are terrifying.
There. I said it.
If you’re anything like me, when someone says the word “budget,” you instantly want to wrap all your favorite splurge items in a big mental bear hug.
“Don’t worry, beer money. I won’t let them get you! HBO, just don’t look at them. Maybe they’ll go away.”
A budget that makes you account for every single dollar can be suffocating. But the problem with this mode of thinking is that it focuses on the negative.
As a self-proclaimed optimist, I know I need to reprogram my brain to see the positives. But how do I do that when someone wants to eliminate all of my fun money?
Here’s how: Work with a budget plan that doesn’t put a stranglehold on your fun money.
And it turns out there is a budget out there that does just that. It’s called the 50/30/20 budget plan, and it’s perfect for people who, like me, freak out at the thought of budgeting.
Seriously, you can even keep your morning Starbucks run.
How to Use the 50/30/20 Budget Plan
The 50/30/20 budget plan was popularized by Sen. Elizabeth Warren, a bankruptcy expert, and her daughter, business executive Amelia Warren Tyagi, in their co-authored book, “All Your Worth: The Ultimate Lifetime Money Plan.”
The goal is to break down your monthly after-tax income and focus your spending in three broad categories.
Essential Living: 50%
This category is for the essential bills. Let me emphasize that word: essential.
- Rent or mortgage: You know, that place where you live.
- Utilities: So you can cook your ramen noodles.
- Groceries: Because those ramen noodles don’t come free!
- Car insurance and/or car payments: You do need a car… or do you?
- Phone and internet: Let’s face it, they’re essentials — they help you read The Penny Hoarder!
- Gas for your work commute: Because the boss thinks you’re too sweaty if you run to work every day.
- Credit card and loan minimum payments: Make no mistake — making the minimum payments on your debts is an essential. You can’t afford to deal with the late fees and credit risks of not meeting that basic requirement. Period.
- Other: Bills that are essential and probably no fun at all. Maybe you have prescription meds, day care costs or even doggie day care. Yes, Mr. Barky counts. But your wine-of-the-month club does not.
Personal Spending: 30%
This is the category that makes this budget work for the budget-averse. It’s all of the stuff you like to spend money on but don’t really need. You know, goofin’ off money. Did you notice the percentage? It’s a decent amount.
- Dining out: Because eating at a restaurant means no dishes!
- Vacations: You could make a case for vacations being a necessity, but for this budget, they’re not. Save up for it, so you can enjoy whatever you’ve saved without the guilt — or the credit card payments.
- Going out for movies or drinks: Seriously, socializing is important. Very important. Your morning latte? Go for it. Budget for it responsibly, and it’s all good.
- Netflix and other in-home entertainment options: Yeah, I felt you cringe here. You finally cut the cord with cable, so this is an essential, right? Nope. There are ways to watch plenty of TV shows for free. That said, if you can fit it into this part of your budget, go for it.
- Shopping for clothes, decor, etc.: I know. That sale won’t last forever! You can get the latest styles, but you have to budget for them.
Financial Goals: 20%
This category puts the focus on helping you improve your financial health, because it turns out that being less poor is more fun than being poor. #lifegoals
- Investments: This includes your 401(k) and all other investments. Don’t have any yet? It’s never too late to start investing.
- Savings: One of the biggest steps to financial health is having emergency savings so you don’t step backward every time an unexpected expense pops up.
- Debt-reduction payments: This is for payments on your credit cards, student loans and any other debts that are above the minimum payment. As long as you owe money, it’s hard to get ahead. And yes, that $400 you borrowed from your roommate for that weekend in Vegas fits here. (Even though it’s interest-free, you may want to pay your friend back first.)
Tips for Budgeting Success With the 50/30/20 Rule
Let’s start with the biggest chunk. That 50% number you should put toward necessities is a maximum. Yes, that’s right. A maximum.
If your monthly bills are higher than 50% of your monthly income, you need to make some adjustments. Ideally, your housing shouldn’t cost more than 30% of your take-home pay. If it does, you may need to consider downsizing. It’s not fun, but it could be a key step to getting ahead financially.
Next, take a good look at your personal spending. Again, that 30% is a hard line. If you go over your past year’s bank statements, you’ll probably find that your spending is a bit high in this category. I know I’ve been guilty.
If you worry about building your savings category to 20% of your income, try these tips:
How often do you eat out at restaurants? Are you using these tips and tools to save money on groceries? Be honest with yourself, and think about lunch during the workday, too. Can you trim that expense? Maybe you’ve got space outside and can start a garden.
Take a hard look at your TV, phone and internet bills. Do you need all of those premium services? Cut back a little and see how you do. When’s the last time you read a book? Check out your local public library for a ton of free books, movies and more.
Shopping: We all love it, even if we claim we don’t. It may be clothes. Or it might be books. Whatever your weakness is, set a budget for yourself. Have old stuff you don’t want anymore? Sell it and add that money to this part of the budget!
Finally, realize that the financial goals category is where this simple budgeting system helps you the most. That 20% is not a hard cap. If you can find a way to save more, pay off more on your debts or boost your investments, do it.
Why the 50/30/20 Budget Works
This method works well for those new to budgeting or put off by rigid spreadsheets.
Splitting your expenses into these three broad categories will get you thinking about the value of your purchases, while providing flexibility as you find your frugal footing.
And by building pleasurable spending into your financial plan, you’ll be able to enjoy what’s most important to you while you find places to cut spending.
When the 50/30/20 Budget Doesn’t Work
For some, the numbers simply won’t add up.
Maybe you have two jobs and still can’t earn double the price of rent in your area. Maybe your day care options are limited. Or maybe your student loan debt is taking up most of your income.
For others, there may not be enough structure in this method. (Looking at you, color coordinators.)
There are plenty of budgeting methods to choose from. Sometimes, you can modify these methods to fit your needs; other times, they just don’t work.
What’s most important is that you zero in on eliminating debt and growing your personal wealth.
Is it fun? No. But when you find a budgeting method that works for you, it’s not torture, either.
Just remember: Personal finance is about prioritizing and then weeding out expenditures you can live without. It’s not about living like a hermit or denying yourself any fun.
Tyler Omoth is a former staff senior writer at The Penny Hoarder.