Whether You Make $8/Hour or $1M/Year, Here’s The Smartest Way to Budget
One of the most difficult parts about getting your money in order is creating a budget.
You start out feeling optimistic and energized, only to lose steam after 30 minutes of troubleshooting Excel, shuffling around irregular expenses and figuring out what’s “normal” to spend on dining out.
That’s why the 50/20/30 method is our favorite way to budget: It works for anyone’s income and needs — whether you make $8 an hour or $1 million a year.
The Tools You Need to Use The 50/20/30 Method
Before we dive into the exact budgeting breakdown, here are a few tools you’ll want to make this process super smooth:
- A very basic Excel sheet to track your spending or, if you don’t feel comfortable with Excel, a pencil, notepad and calculator will do just fine.
- An all-in-one checking and savings account, so your money is in one spot and easy to manage. We suggest using Aspiration’s Spend and Save accounts because you can earn up to 5% cash back on your debit purchases and interest on your savings. It takes five minutes to sign up.
Now that you’ve got what you need to succeed, here’s the 50/20/30 breakdown. So you can get a good feel for it, we ran a hypothetical for someone who makes $50,000.
50: Living Expenses
The “50” of the 50/20/30 method represents 50% of your income. This goes toward living expenses. Think: rent, mortgage, utilities, groceries, car payments, gas and loan payments.
If you’re making $50,000 a year, that’s about $2,000 a month. (This is before taxes. When you do your own budget, be sure to take taxes and other paycheck deductions into account.)
Because most of these expenses are fixed, you can do a good job of predicting how much you’ll spend in this category each month. So, in your Excel sheet (or your notebook), add your fixed monthly expenses up.
If you’re over your 50% allotment, that’s OK. This budgeting method offers some flexibility, so you can cut back in one of the other categories. Or, better yet, push yourself to find ways to cut back on your bills. Pro tip: Car insurance is one of the easiest places to start.
You’ll want to manage the money for your living expenses out of your checking account. But don’t forget to use your Aspiration debit card to buy your groceries, fill up for gas and pay those monthly utility bills, so you can get cash back.
20: Money Goals
What are your money goals this year?
You’ll want to dedicate 20% of your income to hitting these goals, which can include investments, savings and debt-reduction payments above the minimum amount. If you make $50,000 a year, you’ll set aside about $800 toward this portion of your budget each month (again, pre-tax).
Once you’ve set up your goals (make sure to keep them realistic), go ahead and automate them.
For example, if you want to save 10% of each paycheck this year, set up recurring deposits with your Aspiration accounts. Send 90% of each paycheck to your Spend account and the other 10% to your Save account. That way, there are no spending temptations, and you don’t even have to think about saving.
Then, if something comes up (heaven forbid there’s an emergency) and you need money from your savings, you’re just a few taps away from transferring it over to your Spend account. Easy.
Aspiration also offers a number of investment funds and retirement IRAs, so if you want to focus on investing or boosting your retirement savings, you can do so all through the app.
30: Personal Spending
One of the most difficult parts about budgeting is that you start feeling totally restricted. No more Starbucks runs, no more new clothes, no more vacations, no more fun.
But budgeting doesn’t have to work that way, and that’s why we love this method because 30% of your income is dedicated to “fun money.” For someone who makes $50,000 a year, that’ll be about $1,200.
Now, that doesn’t necessarily mean you go out and blow your money on a single Target run — though we could totally buy out its candle section.
Instead, keep this money in your checking account and dedicate it to grabbing drinks with your friends, enjoying takeout with your partner or putting it toward your vacation fund. If you have any left over, Aspiration makes it super easy to just slide it over to your savings account at the end of the month.
And, again, this budgeting style is flexible, so if you’re spending more than 50% of your income on living expenses, maybe you take 5% away from your fun money. Or if you have lingering high-interest credit card payments, dedicate more of your budget to your money goals, versus your fun money.
Ready to Start a Budget You’ll Actually Be Able to Maintain?
Whether you make $8 an hour or $1 million a year, you’ll be able to easily adapt the 50/20/30 budgeting method to fit your needs.
Be sure to start your newfound budgeting journey with the right tools, too. All you need is a basic Excel sheet (or notebook, pencil and calculator), and we recommend a joint spending and savings account, like Aspiration’s. That’ll make transferring the money between your accounts super easy, and you can easily keep an eye on your spending and saving progress.
With Aspiration, it literally takes five minutes to sign up for the Spend and Save accounts.
Oh, and consider the money you’ll earn through its debit cash back and savings interest a nice little bonus, and shovel it toward your fun money.
You deserve it!
Carson Kohler ([email protected]) is a staff writer at The Penny Hoarder. She’s a big fan of streamlining her money accounts, so she doesn’t have to manage and keep tabs on multiple accounts each month.