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.

udget2

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
  • Utilities
  • Food 
  • Basic necessities like clothing
  • Transportation
  • Childcare
  • Healthcare
  • Minimum debt payment

breakingpic image

Photo: Breakingpic

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: 

  • Shopping
  • Eating out
  • Traveling
  • Entertainment and luxuries
  • Electronics

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.

  • Savings
  • Investing
  • Paying off debt beyond the minimum balance

budget1

Photo: Karolina Grabowska

Related post: Assessing your financial health.

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.

Related post: Achieving financial independence

“A budget is telling your money where to go instead of wondering where it went.” 

John Maxwell