Ask 100 people how they budget their money, and you’re sure to get 100 different answers. Truth is, there is no method that works for everyone. But there are some guidelines that can help make the process easier, particularly if you’re the type who can’t be bothered to keep track of how much you spend across 20 different categories. (Does the idea of tracking how much you spend on toothpaste versus protein bars sound appealing? Us neither.)
The 50/20/30 method is one guideline to consider if you want to go the simpler route because it splits everything into three main categories:
1. Essential Costs: 50%
These are costs like rent, mortgage payments, utilities, car payments, public transportation or groceries — anything that covers your basics. Think of it this way — if you need to pay for it in order to live or work, then it’s an essential. Also included: The minimum payments you need to make on any credit cards or loans. With this method, you would aim to spend no more than 50% of your take-home pay in this category.
2. Financial Goals: 20%
This is the part of your budget that is really about helping you secure your financial foundation. It includes what you put toward emergency savings, retirement and other future goals, like a home down payment fund. It also includes extra money you put toward debt, like credit card payments that go beyond the minimum or extra student loan payments. With this method, you would put at least 20% of your take-home pay toward your financial goals — think of it as paying your future self.
3. Lifestyle Costs: 30%
Finally, you would budget no more than 30% of your take-home pay toward those costs that are really wants versus needs. That could include eating out, shopping, concert tickets and other variable costs (like those fabulous new shoes you’ve had your eye on).
50/20/30 in Action
The 50/20/30 guideline is just that — a guide. It can be a helpful benchmark when you’re assessing where your money is going, but it can also be adjusted to your specific lifestyle and goals. Here’s an example of how this could play out in the real world. Here’s a hypothetical budget for Stacey, a 22-year-old recent graduate with her first job, working in Chicago. She has student loans, but she is still able to meet her student loan payment every month and contribute to a Roth IRA, plus pay all her bills.
Her income: $36,000 a year
Her take-home pay after taxes: $2,250 a month (we're assuming 25% of her salary goes toward a combination of taxes and her 401(k) contributions)
Utilities (including phone and internet): $135
Gym and subscriptions: $75
Total: $1,100, which is about 49% of her take-home pay
Student Loan: $150
Roth IRA contributions: $200
Emergency fund: $75
Backpacking trip fund: $50
Total: $475, which is about 21% of her take-home pay
Lifestyle Costs: $675, which is 30% of her take-home pay
Because Stacey is on a tight budget, her fixed costs are very close to the 50% limit. Still, she is able to make her student loan payment and even put 9% of her take-home pay toward retirement.
A Few Things to Keep in Mind …
As you might have noticed, the 50/20/30 guideline uses your take-home pay as the baseline for your budget. Any contributions you make to retirement before your paycheck hits your bank account are not included, so you may actually be contributing more toward your financial goals than this breakdown would suggest. (And you may find that it's a good thing to keep that retirement money out of sight, out of mind!)
Also, if you are self-employed and don't have your retirement contributions withheld from your paycheck, consider contributing more than 20% of your take-home pay toward your financial goals, if you can afford it. This could help you make sure you're contributing enough to stay on track for retirement.
The 50/20/30 guideline can serve as a useful benchmark, especially if you’re just starting to budget and want to know how to divvy up your paycheck. But when it comes down to it, how you spend (and save) your money depends on your specific goals and lifestyle.