Is 50/30/20 The Best Budgeting Method?
Updated: 6 days ago
Why 50/30/20 Is The Easiest Budgeting Calculator
A few weeks ago, I wrote about my favorite ways to save money, and why saving money is more important than ever. Despite a great job market, people are still experiencing brutal inflation, and a few are even taking on unemployment, which will burn a hole through your savings faster than Amber Heard through a set of bed sheets.
One of the questions I got after publishing that article is: How do I get started? It's a fair question. Most of these budgeting tips assume that you, in some way, actually have a budget. But what if you're starting from zero? What's the best budgeting plan?
Today, let's cover the best way to make your budgeting calculator - The 50/30/20 Method. This tried and true method will pump your savings, give you some breathing room and even get you investing with all those hedge fund managers. Let's go!
What Is The 50/30/20 Method?
The 50/30/20 Method is a way to break up your post-tax income into three buckets: needs, wants and saving/investing and debt. The idea around this method is to give you the most amount of money to handle what it takes to live, while affording you some wiggle room on things like dining out or investing money. Let's break it down a bit further...
50% of Your Income Dedicated to "Needs"
Do you need to eat? How about paying for your mortgage, or budgeting for rent? Congratulations! You officially have "needs." This part of The 50/30/20 Method is entirely dedicated to funding everything needed to keep you alive. That includes:
Budgeting for rent or mortgage
Any compulsory fees (think HOA bills or annual fees on your credit card)
Any health care expenses
Pet supplies (food, veterinary bills, etc)
I know, I know. It's a long list, but humans take a lot to survive. You want to make sure you're not going to get caught short each month when you have to decide between a sandwich and beer.
The biggest expense for most people reading this will be budgeting for rent. Budgeting for rent is critical to ensure you don't fall behind on payments, accruing interest or getting evicted. It's crucial to know on what date the rental company takes the payment so you know you have enough in your account to cover your payment exactly when you need it!
30% of Your Income Dedicated to "Wants"
So what is a "want?" Well, in this budgeting method, a "want" is something that you don't need to stay alive, but it sounds pretty good to have anyway. This list includes things like:
Entertainment like concerts or movie theaters
Those Gucci flip flops you've been eyeing
Oftentimes, the hardest part of this budget will be determining your "needs" versus your "wants" and not trying to justify those flip flops as "OMG I neeeeeed those," so you can spend your rent money on stupid shit.
Everyone is different in what they consider in each bucket. If you read some guides around the web (don't. Just stay here.), then some consider an internet connection as a "want." I consider it a "need" because it's almost impossible to make a living and function as a human being without it.
20% of Your Income Dedicated to Saving, Investing and Debt
This is usually the least fun bucket for most people, but it can also certainly be the most powerful. This bucket of money should be used for:
Saving to build your emergency fund
Investing after your emergency fund is built
Paying down high interest debt
Since my whole schtick here is teaching you how to save, invest and pay down debt more effectively, I've written whole guides on each of these concepts. If you need an intro guide to any of these, here are your best bets:
General Guidelines for The 50/30/20 Method
It would be irresponsible of me, or anyone online, to dump you with some tips and then head for the hills. In that spirit, here are some guidelines that you should keep in mind when you want to use this 50/30/20 Method to get better financially.
Pay Yourself First
Despite me listing the above as "50/30/20," the order should actually be "20/50/30." Take Warren Buffett's advice and pay yourself first in order to maximize your savings rate, or your debt paydown.
Carving that cash out on the front end gives you a more defined budget to work from for the rest of the month, and it puts your mind at ease when you're paying down debts or working on building up that emergency fund.
Maximize Your Spending With Credit Cards
If you're spending money, you may as well get something back for it, right? Imagine that every store you walk into had a 3-5% off sale. That can be your reality when you shop with the right credit card.
Taking advantage of credit card multipliers can be extremely powerful over time. Find yourself spending the most amount of money on groceries and dining out? Then the American Express Gold Card might be the best option for you.
If travel is more your speed, then the American Express Platinum Card or Chase Sapphire Reserve Card could maximize your spend.
Taking advantage of these cards and earnings multipliers could pay dividends down the road. Free flights, hotels, cash back and even direct deposits into an investment account can all be a byproduct of your average, everyday spending.
Don't Overestimate Your Income
So this whole 50/30/20 Method thing is great if you have a constant, consistent paycheck. But what if you don't? People reading this might be in sales with variable commissions, or shift workers who see different hours from week to week. Hell, if you've read any of my income reports then you know the life of a blogger can change from month to month. So how do you budget in that instance?
Take an average! Look at the last 6 months of your income, and average it out to a per-month basis, then, knock 10% off and use that number. That extra 10% will give you a cushion in case you get sick, have your hours cut or something similar, and will prevent you getting caught short if you're budgeting to a lower number.
Related: Finance Blog Income Reports
Stay Flexible In Your Monthly Budgeting
I would love to tell you that everything will stay the same forever. Your rent will be the same every month, and so will your groceries and your friends won't want that second margarita at brunch. However, I have some bad news: your costs and obligations will almost certainly change from month to month.
Staying flexible in your budget is really important, but what's the best way to do it? That's the beauty of this 50/30/20 Method! If your groceries bills increase, pull that extra percentage from your bucket meant for dining out! Just try not to pull from your 20% bucket, because that will hit you down the road on either your debt repayment or your emergency fund.
The Bottom Line
Budgeting is usually viewed like dieting: not fun, hard to do and no one sticks with it. The hard truth is, however, that this is how the financially literate get ahead in life. They are able to form their budget in a way that works for them, and they stick to it in order to advance.
Give the 50/30/20 Method a try for at least 6 months. If you find that this really doesn't work for you, try another method! My favorite outside of 50/30/20? Automating everything through my favorite tool, Albert!