Over the years, I have been asked many questions on how to properly budget. Budgeting often gets a bad reputation for being time-consuming and restrictive. However, budgeting is not about limiting yourself; it is about understanding how much money you have and making plans for your money. Budgeting is an art that can help you stretch your income.
The 50/30/20 budgeting method is a simple way to start budgeting and take control of your finances.
The 50/30/20 budgeting method suggests that you split your after-tax income as follows:
- 50 percent on your needs
- 30 percent on your wants
- 20 percent on your saving goals
Which expenses fall in the 50 percent?
Based on the 50/30/20 method, you should aim to spend up to 50 percent of your after-tax income on your needs or essentials. The following expenses are considered needs:
- Rent or mortgage
- Basic necessities like clothing
- Minimum debt payment
Which expenses fall in the 30 percent?
According to this budgeting method, you should plan to spend a maximum of 30 percent of your after-tax income towards your wants. Wants includes the nice things in life you may enjoy such as:
- Eating out
- Entertainment and luxuries
Which expenses fall in the 20 percent?
Under this budgeting method, you should plan to spend 20 percent of your after-tax income on your needs or essentials.
- Paying off debt beyond the minimum balance
Photo: Karolina Grabowska
The 50/30/20 budgeting method is a good option to consider if you are new to budgeting. It is straightforward to apply and can help you become comfortable with the idea of having a budget. However, this method is not suited for the long-term or for high-income earners. When you are in a high-income bracket, and as your income increases, spending 30 percent of your income on your wants can be excessive. It is wise to keep “needs” related costs at a conservative level as your income rises while increasing your savings rate to invest more aggressively towards retirement, debt repayment, or even projects that interest you.
“A budget is telling your money where to go instead of wondering where it went.”