How The 50-30-20 Budget Really Works : Many people shudder at the word budget. Rightfully so. For years people have been told that budgeting is a complex and frustrating task. However, there are many budgets out there for people of all needs and lifestyle. A budget doesn’t have to be difficult.
A 50-30-20 budget might work well for you if you want to simplify your budgeting process, or if you are just starting out. It involves 3 simple steps that will help you prioritize your monthly financial commitments.
the budgeting method is comprehensive and covers all bases. Also, if you’re afraid to do the math, there are calculators to help you out with this method.
Here, we will explore what the 50-30-20 budget is and how it works. We will also discuss a useful 50-30-20 budget calculator that you can use immediately.
What is a 50-30-20 budget?
This rule splits your income after taxes into three distinct buckets, each one with a unique value:
- 50% to needs
- 30% to wants
- 20% to savings
This plan keeps your finances simple and easy to follow.
How did the 50-30-20 budget start?
The 50-30-20 budget was developed by U.S. Senator Elizabeth Warren in a book called All Your Worth: The Ultimate Lifetime Money Plan. The 50-30-20 budget is popular today because it is both simple and easy to apply.
Why the 50-30-20 rule works
You might be wondering why this budget works. There are a few reasons.
A few things you should know about the budget. Trying to figure out specific categories for your finances can be a lot of work if you don’t know where to begin. It focuses on three buckets – needs, wants, and savings.
It also helps you account for every dollar. You start by adding up all your after-tax income, which is 100% of what you’re left with, and then work it out from there.
Last but not least, saving up for large expenses like a house or a new car or using it to pay off debt can help you.
How to use the 50-30-20 rule to create your budget
After-tax income is the amount left over after taxes (federal, state, medicare, and social security) is removed from your income. To figure out your take-home pay quickly, check your pay stubs.
For those who run their own businesses, taking their gross income and subtracting any business expenses and state or federal taxes will still result in an after-tax income.
It’s now time to split your income into 3 categories once you’ve calculated your after-tax income.
Category 1: 50% Needs
This is your basic need category. It includes your rent or house payments, car payments, utilities, food, car insurance, and debt payments. As you can see, the needs category only includes items you can live without. Do not include entertainment or fine dining in this category.
If you are spending more than 50% after taxes, you may want to re-evaluate your expenses. Are you paying too much for rent? Are you spending too much on transportation? Do you spend too much money on week-day lunches?
Regardless of what the case may be, you may be able to make immediate changes to your spending that will bring down your costs. You can move to a more affordable home or begin taking public transportation to keep costs down. Additionally, you can make lunch at home and bring it to work.
Category 2: 30% Wants
Wants are all those items that you spend money on. These are things you don’t necessarily need. Wants can include things such as going to the movies, eating out, new electronic gadgets, new handbags, and shoes, or tickets to a big game.
There are many good alternatives for wants that cost little to nothing. For example, you might want an iPhone, but you can buy an older version with the same features. You might want to join a gym, but can work out at home instead.
With almost every item you want to buy, there is almost always a less expensive alternative. That being said, it is crucial to balance your wants vs. needs so that from time to time you can experience these activities. Just remember to be wise and use common sense.
The wants of some people may include premium experiences that are out of reach financially. For instance, someone may want a new BMW when they can easily afford a Toyota. Be careful of your wants since it can be easy to justify spending on something if you really want it.
Category 3: 20% Savings
Savings is the most important category for your future. Savings is both savings and investments. Savings may range from your emergency fund to your savings account. Savings can also include money market investments that you have.
Any money you have set aside for the purpose of earning an income is considered an investment. This might include buying real estate, investing in the stock market, or setting up a retirement account.
Having three to six months’ worth of living expenses in your emergency fund should be your highest priority in this category.
Additionally, focus on your retirement savings, which might include money put into an IRA or a 401(k). You might want to consult with an advisor regarding this procedure.
As a final point, debt repayment also falls under the savings category, even though we included it in the “needs” category. Any payments that you make to cover the minimum requirements fall under the “needs” category.
Additional payments towards interest and principal are considered savings. This is because they are “saving you” from future interest payments down the road.
Using a 50-30-20 budget calculator
Figuring out your 50-30-20 budget does not have to be difficult. In fact, it can be as easy as using a simple budget calculator.
This calculator was created by Banzai together with Shinhan Bank. All you need to do is enter your post-tax income and it does the rest for you! You’ll have an easy time determining how much to allocate to each category.
Takeaways from the report
Finally, budgeting doesn’t have to be difficult. The 50-30-20 budget can be a good way to start budgeting. It can help you get to your budget goals in a fast and easy way. Remember to use your post-tax income as your basis for further calculations. Now that you have all the steps in place, go ahead and get started today!