It’s likely that the word budget makes you cringe. And for good reason.
Budgets are often portrayed as challenging. Nothing could be further from the truth. You should just use your budget as an instruction manual. It’s not difficult to find a budget that can work for different lifestyles and needs.
Budgeting with the 50-30-20 method may prove to be a great option for those who want to simplify the process or are new to budgeting. Your monthly financial obligations can be prioritised by following these three simple steps.
Known as the 50-30-20 rule, this budgeting method covers all the bases. Additionally, if you don’t like to do maths, there are a lot of calculators that can help you.
In this blog, we will explore the 50-30-20 budget. What it is, how it works, and we’ll also explore a great 50-30-20 budget calculator that you can start using immediately.
What is a 50-30-20 budget?
According to the 50-30-20 budget rule, your after-tax income is divided into three distinct categories. Here are the categories:
- 50% to needs
- 30% to wants
- 20% to savings
Why the 50-30-20 rule works
You might wonder why this budget works. Here are some reasons.
It’s simple, to begin with. If you’re not a detail-oriented person or if you’re just getting started, this budget is fail-safe and straightforward. It focuses on only 3 buckets – needs, wants, and savings, all of which are pretty straightforward to figure out. Your finances do not need to be divided into specific categories.
Secondly, it helps you account for every dollar. You start off with your after-tax income which represents 100% of what you must work with, and then you work out the different categories from there.
Lastly, it can help you save up for large expenses such as a house or car or it can help you pay down your debt!
How to use the 50-30-20 rule to create your budget.
Following the 50-30-20 budget rule is very simple. First, determine your after-tax income. Income after taxes is simply what’s left after taxes are deducted.
These taxes include federal, state, Medicare, and Centrelink. If you want a quick and easy way to figure out your take-home pay, simply look at your payslips.
However, if you are your own boss, it is still possible to figure out your taxes afterward. Then subtract any state and national taxes along with your gross income.
Once you’ve calculated your after-tax income, the fun begins. Next, you can split up your income.
Category 1: 50% Needs
This category includes all your basic needs. These are the things you can’t live without. In addition to your rent or house payment, you can include health insurance, food, car payments, and utilities.
As you can see, these are the only things you need to survive. Entertainment, takeout, and fine dining are not included in this category.
Ideally, you should be able to meet your needs with 50% of your after-tax income. You may want to re-evaluate your spending if you’re spending more than this.
Are you paying too much for rent? Are you spending too much on transportation? Is your weekly lunch budget big?
It doesn’t matter what your spending looks like, you can make immediate changes that will reduce expenses. If you are concerned about costs, you can find a less expensive home or use public transportation. In addition, you can make lunch at home and bring it to work.
Category 2: 30% Wants
Wants are all the things you spend money on. None of these items are necessities. Wants include things like going to the movies, eating out, buying new electronics, handbags, and shoes, or tickets to a big game.
Substitutions involve spending little to no money. It is possible to buy an earlier version of an iPhone and still receive the same benefits as buying the latest version. Taking a class at the gym might be a good idea, but you can also exercise at home.
There is almost always a cheaper alternative to almost anything you want to purchase. Having said that, it is important to balance your wants with your needs so that you can occasionally enjoy some of these activities. Exercise wisdom and good judgment, however. Managing wants is notoriously difficult.
For some, wants may include premium experiences that are beyond reach financially. For example, someone may want a new BMW when they can easily have a Toyota that would cost much less. Exercise wisdom with your wants as it can be easy to justify spending if you really want something.
Category 3: 20% Savings
This category may be the most crucial for your future. Investing is also referred to as savings in this case. From your emergency fund to your savings account, you can save in many ways. Investments in money markets can also be included.
An investment is any money you set aside to generate income. For instance, you can invest in the stock market, purchase a home, or establish a retirement account.
A good place to start is by setting up an emergency fund. In an emergency fund, you should have three to six months’ worth of living expenses.
Next, save for retirement. You might want to look into working with an advisor. The team at Chase Edwards can help you to set this up.
Lastly, debt repayment is also a form of saving. You might be wondering how as we had included debt payment in the “needs” category. Any payments you make to cover the minimum requirements fit into 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.
In conclusion, budgeting does not have to be difficult. The 50-30-20 budget can be a great way to get your feet wet in the world of budgeting. It can help you achieve your budget goals in a quick and easy way.
Remember to use your post-tax income as your base and make further calculations from there. Now that you have all the steps in place, go ahead and get started today!