In this post, I’ll explain the 50/30/20 budget and tell you when it can be very helpful and when it fails.
Budgets suck don’t they! They always tell me that I don’t have enough money to do what I want to do.
You know what would be great?! If there was a budget that actually focused on spending money on what I want to spend money on.
Well, my friends, I got good news for you today because there is such a budget
Since I will be doing multiple budgeting posts like this on this blog I have to say that this isn’t me saying that one budget is the best budget or that one budget is better than another budget.
That’s not my goal with these posts, this is a financial education Blog so my goal is just to let you know what options are out there for you and let you make an informed decision when the time comes to choose your own path.
Anyways since this is my first budgeting post I thought I’d start off with a fairly simple one and it’s known as the 50/30/20 budget or sometimes as the balanced money formula it was popularized by Elizabeth and Amelia Warren in the book The ultimate lifetime money plan.
What is the 50/30/20 budget?
It’s really just a simple way to get started on a budget, it’s a rule of thumb budget meant to help you figure out how much of your income should be going to certain items
The 50/30/20 budget tells you that 50% of your income should go towards necessities, 30% towards your wants, and 20% for your financial goals whether it’s paying off debt or saving for retirement
I should also say that these percentages are calculated based off of your after-tax income
Now your Necessities are basically the four walls of your financial house. They include things like housing, food, basic clothing, and transportation as well as some other bills that you may need to pay to survive
Wants could probably be anything from that Netflix subscription to going out to eat more often and I already mentioned some examples of what financial goals are and they are entirely dependent on you.
So who does this work best for?
Since it is a pretty simple budgeting system I would say that it could work particularly well for beginners, those who are just starting to budget and don’t want anything too complicated and are not having any serious financial troubles when it comes to things like debt and I’ll go in to why I think that in a minute.
I also think that it can work well for those who are debt-free especially if they’re still relatively young and, again, I’ll illustrate why I think that in the example in a minute but first I want to cover why this budget could fail
Why this budget could fail?
Since this budget specifically requires you to be able to determine what is a need and what’s just a want, if you’re not very good at doing that this budget may not be the best starting option for you
Just imagine that you’re making $50,000 a year, you’re living in California because let’s face it, the weather there is incredible everybody knows this and you’re looking for an apartment
you’re young and single so you don’t need a whole lot of space in an apartment but there’s just a lot of really nice places to live there and say you select a really nice apartment in Hollywood because it’s got so many things that you totally need like that awesome fitness center, that pool, or that hot tub and so many great things
Now it’s a studio but still costs you about $2,500 a month and I’ll even say that that’s with utilities for the sake of this example because I’m feeling a little generous towards our hypothetical Californian
Now, let’s take a quick step back here, $2,500 a month is $30,000 a year which on its own is already over the 50% of our $50,000 income and we haven’t even covered the other Necessities yet
We haven’t thought about food, clothes for the new job, and we haven’t thought about gas and insurance do you see where this is headed
We’re not going to have that much leftover for our wants and that’s before we even consider the effect that debt may have on the situation assuming our hypothetical Californian hasn’t
So yeah, not knowing how to separate needs from wants is clearly one way that this budget could end up failing but that’s not the only time that it can fail
It could also fail again if you have too many debts
Let’s take that same hypothetical Californian and instead of putting them in the nicest and probably almost the most expensive apartment they looked at
Let’s say that they got a more modest apartment around $1,200 a month, it may not have that fancy fitness center or that pool but it’s still a nice enough place to live, at least while we build up our financial Foundation
Let’s say that their food expenses are around $300 a month and their basic clothing needs costs about $100 a month on average and $500 a month into Transportation costs, that puts us right around $2,100 a month in the necessity or about $25,200 a year.
so we are a little bit over our limit but still, very close, we’re just going to have to cut back a little bit on our wants unless of course, we have a mound of debt
The average car payment in America is about $500 a month and the average student loan debt is about $37,000 According to student loan expert Mark Kantrowitz
Now, that will come down to an average payment of over $380 a month assuming a 4.5% interest rate on the student loans and according to NerdWallet, the average household credit card debt in 2017 was over $15,000.
Meaning the minimum payment would probably be somewhere in the neighborhood of $350 a month or about $4,200 a year, again assuming an interest rate of 15% will say on the credit card
That’s nearly $15,000 a year of our wants that are practically just walking out the door and it means that our debt and living expenses are about $40,000 a year, in this scenario anyway.
This means that not only do we have no money whatsoever leftover for the wants in our life but we also just barely have enough to hit the 20% Mark for our financial goals which in this case would probably be paying off debt
so again, at least in this scenario with these numbers this budget probably would end up failing, obviously, if you make a lot more than $50,000 a year after taxes and had these expenses you may not have a problem, again it all depends on your situation
But I don’t like to just look at the negative, so what happens when this budget actually does work?
When does the 50/30/20 budget work?
Let’s take that same hypothetical Californian and put them in the same $1,200 a month apartment with the same living expenses as before except this time they’re debt-free
So they’re able to enjoy their wants to the tune of over $1,200 a month and still put away $10,000 a year, assuming they work for 40 years and get an average rate of return of about 8% in the market they would wind up with nearly 2.8 million dollars by the time they retire
so that’s how it works if there’re any types of budgets that you want me to cover let me know in the comments below
Conclusion for the 50/30/20 budget
The 50/30/20 is a great budget for beginners and debt-free persons. It’s very simple and easy to figure out.
Whatever the budget you use I recommend you to have a financial coach, whether it’s your wife/ husband, girlfriend/ boyfriend, or just a close friend you need to have someone who holds you responsible and help you stick to your budget.
I tried multiple times to stick to my budget by my own but I always find or do something that ruins all my budgeting plans that’s why I used my girlfriend, now my wife, to help me with my finances.
Thanks for your time
This was my approach to the 50/30/20 budget. I hope you liked it and if you did then I recommend you to join my newsletter I post about money management and how to make money online.
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