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
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.”