50/20/30 Method Is Perfect if You’re on a Budget… but Still Have a Life

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A person gets their monthly budget in order.
Carmen Mandato/ The Penny Hoarder

Budgets are terrifying.

There. I said it.

If you’re anything like me, when someone says the word “budget,” your mind instantly wraps all of your favorite splurge items in a big mental bear hug. “Don’t worry beer money. I won’t let them get you. HBO, don’t look at them and maybe they’ll go away!”

The problem with this mode of thinking is that it focuses on the negative. The idea of a budget that makes you account for every single dollar is suffocating.

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.

It turns out there is a budget out there that does just that. It’s called the 50/20/30 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 50/20/30 Budget Plan. It’s Simple.

The idea of the 50/20/30 budget plan was popularized by U.S. Sen. Elizabeth Warren, a bankruptcy expert, and her daughter, business executive Amelia Warren Tyagi, in their joint book “All Your Worth: The Ultimate Lifetime Money Plan.” The goal is to break down your monthly take-home 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.
  • Groceries: Because those ramen noodles don’t come free!
  • Car insurance and/or car payments: You do need a car… right?
  • Phone and internet: Let’s face it, they’re essentials — so you can 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 your 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. Yeah, Mr. Barky counts, but your wine-of-the-month club does not.

Financial Goals: 20%

This second category puts the focus on helping you improve your financial health. 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. 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.) As long as you owe money, it’s hard to get ahead.

Personal Spending: 30%

This is the category that makes this budget work for the budget-squeamish. 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.

  • Vacations: You could make a case for vacations being a necessity, but for this budget, they’re not. Save up for it and then enjoy whatever you save without the guilt — or your credit card.
  • Going out for movies or drinks: Seriously, socializing is important. Very important. Your morning latte? Go for it. Budget responsibly for it, 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! Get the latest styles, but budget for them.

Tips for Budgeting Success With the 50/20/30 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.

Find other ways to cut your monthly expenses by making your home more energy efficient and shopping smart for groceries. How much space do you have outside? Maybe it’s time to start a garden to keep those costs down. Come on, get a little dirty — you might even love it.

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 you are fudging a bit high in this category. I know I’ve been guilty. Try these tips:

  • How often do you eat out at restaurants? Be honest with yourself and think about lunch during the workday, too. Can you trim that? You can probably cut that in half without suffering a bit. Don’t believe me? Try it.
  • 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. 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 20% 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.

The goal for budgeting is to get out of debt, and increase your savings and investments. Of course, you want to get to a point where you can buy your dream home, and have the income you need to take amazing vacations and live the life you dream of living. To do that, you need to zero in on eliminating that debt and growing your personal wealth.

Is it fun? No, but with the 50/20/30 rule, it’s not torture, either. It’s about prioritizing and then weeding out those expenditures you can live without. It’s not about living like a hermit or denying yourself any fun or extravagance.

Tyler Omoth is a senior writer at The Penny Hoarder who loves soaking up the sun and finding creative ways to help others. Catch him on Twitter at @Tyomoth.

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