Budgeting: Using the 50/30/20 Budget Method

The 50/30/20 budget method is a simple yet effective way to allocate your after-tax income into three main categories. There are other budget methods, but I like the simplicity of this guideline. Use it as a guideline to help bucket your current expenses and identify where your money is really going.

Here's what typically falls into each bucket for needs, wants, and savings:

50% - Needs

These are the essential expenses that you cannot live without and are necessary for maintaining your basic lifestyle and job. If you cut these, your life would be significantly impacted. However many of these are variable depending on quality. If you're exceeding your budget in this category, you'll want to explore options and alternatives to cut down here. For instance, could you find a lower cost apartment or roommates to cut housing expenses?

Housing:

• Rent or mortgage payments

• Property taxes (if you own a home)

• Homeowner's Association (HOA) fees

• Renter's or homeowner's insurance

Utilities:

• Electricity

• Gas

• Water/Sewer

• Trash/Recycling

• Basic internet service (essential for work, communication, and often education)

• Cell phone bill (basic plan, essential for communication/safety)

Food:

• Groceries (for cooking at home, basic staples)

• Essential household items (cleaning supplies, toiletries, laundry detergent)

Transportation:

• Car payments: I actually deviate from other experts and consider this a want. My reasoning:

• Ideally you should be paying for a car with cash. A car is a depreciating asset and paying for an asset that immediately loses value on a loan you're paying interest on is just plain silly.

• If you live anywhere near public transportation or can walk or bike to your work, you may not need a car and the associated costs to insure, store, and fuel. You may want to consider car sharing with a friend or partner, carpooling, walking, bicycling, or bus or train. Most communities now even have on demand, share-riding transit.

• Car insurance

• Gas/fuel

• Public transportation costs (bus, train, subway passes)

• Basic car maintenance (oil changes, tire rotations)

Healthcare:

• Health insurance premiums

• Prescription medications

• Essential medical co-pays/visits

Minimum Debt Payments:

• Minimum payments on student loans, car loans, personal loans, or credit card debt. (Note: additional payments go into the savings/debt bucket, but the bare minimum to avoid default or fees is a "need.")

Childcare/Dependent Care:

• Costs necessary for you to work or pursue essential activities.

30% - Wants

These are the expenses that improve your quality of life and bring you enjoyment, but are not strictly necessary for survival. If you cut these, your life would be less convenient or fun, but you'd still be able to function. This is often the most flexible category where you can make cuts to free up money.

Dining Out/Takeout:

• Restaurant meals, coffee shop runs, delivery services.

Entertainment:

• Streaming services (Netflix, Hulu, Spotify, etc.)

• Movies, concerts, sporting events, theater tickets

• Video games, books (beyond educational/work needs)

• Hobbies and leisure activities (e.g., craft supplies, specialized sports equipment, non-essential club memberships like a premium gym if a basic one would suffice, or none at all)

Shopping (Non-Essential):

• New clothing (beyond basic necessities for work/daily life)

• Accessories, jewelry

• Electronics, gadgets (upgrades that aren't essential)

• Home decor that isn't essential

Travel & Vacations:

• Weekend getaways, flights, hotels

Premium Services/Upgrades:

• Higher-tier internet or phone plans with extra features

• Spa treatments, salon services beyond basic upkeep

• Gym memberships (if not medically necessary)

Gifts:

• Birthday, holiday, or special occasion gifts

Charitable Donations:

• While noble, these are generally considered discretionary in this framework.

20% - Savings & Debt Repayment

This category is dedicated to building your financial future and improving your financial standing.

Savings:

• Emergency Fund: Building 3-6 months of living expenses.

• Short-Term Savings Goals: Down payment for a car, a planned major purchase, a large trip, new furniture, etc.

• Long-Term Savings Goals: Down payment on a house, future education.

Investments:

• Contributions to retirement accounts (401(k) beyond the employer match, IRA, Roth IRA).

• Contributions to brokerage accounts for long-term investing.

Extra Debt Payments:

• Any payments made towards loans or credit card balances above the minimum required payment. This accelerates debt repayment and saves on interest. Try to pay off debts as fast as possible. This will help you not only reduce your expenses in the "needs" bucket, but also increase your savings and investment allocations.

Key Considerations:

• Flexibility: The 50/30/20 is a guideline, not a strict law. Life circumstances (living in a high-cost-of-living area, having significant student loan debt, etc.) might mean your percentages need to be adjusted (e.g., 60/20/20 or 50/20/30). The goal is to use this as an easy guideline so you will sit down and budget and understand where your money is really going. Once you have done that adjust where possible to meet your specific financial situation.

• Putting into practice: Each month set aside what you will need to cover the needs category. Then transfer or pay anything in the 20% savings bucket. What is left over is what you have for wants. Moving your money to savings before you start spending is "paying yourself first".

• Building wealth: Try savings creep instead of lifestyle creep. When you advance in your career and start making more (or you reduce your "needs" by buying off some debt), add more to your savings bucket. You may be able to adjust your allocation to 40/20/40 to build wealth and get to financial freedom quicker.

• After-Tax Income: The 50/30/20 rule is based on your net income, which is the money you actually take home after taxes, health insurance premiums, and pre-tax retirement contributions (like a 401(k) contribution) are deducted from your gross pay. When you add these into your budget, you'll want to also adjust your net income total.

• Overlap: Sometimes an item might blur the lines (e.g., 15-year old works-just-fine car versus a new car). The key is to be honest with yourself about whether it's truly essential or if it's an upgraded choice. Something may be a need this month like your current rent, but you may be able to reduce long-term.