A 50-30-20 budget plan can give you an edge on your money management. There are plenty of pages on the internet and apps available for your phone or iPad to give advice on saving your money, investing your money, and cash-only lifestyles.

• What is the 50/30/20 Budget?
• Calculate Your After-Tax Income
• 50% for Needs
• 30% for Wants
• 20% for Debts & Savings
• Final Thoughts
• Tips

What is the 50/30/20 Budget?

The 50-30-20 budget is one of the latest ways to save your money and make it grown. The idea was first made popular by Elizabeth Warren and Amelia Warren. The rules are easy and the financial advice contained therein is sound.

Read Also: How to Use Economic Cycles to Your Advantage

The 50/30/20 budget is a way to divide up the money you are making into easy payment chunks consisting of needs, wants and debt and savings. You start with your average monthly income without the taxes, health insurance or retirement plans included. The money you have left over is the amount you have to start your budget with.

The 50/30/20 budget works best if you know about how much income you can expect in any given month. This means you have a stable income and that you know the minimum you can make each month without factoring in overtime and bonuses because those aren’t always assured.  If your income is unstable due to changing hours or schedules, other budget plans may work better.

Calculate Your After-Tax Income

Your after-tax income is what remains of your paycheck after taxes are taken out, such as state tax, local tax, income tax, Medicare, and Social Security. If you’re an employee with a steady paycheck, your after-tax income should be easy to figure out if you just look at your paystubs. If health care, retirement contributions, or any other deductions are taken out of your paycheck, add them back in.

If you’re self-employed, your after-tax income equals your gross income minus your business expenses, such as the cost of your laptop or airfare to conferences, as well as the amount you set aside for taxes. You’re responsible for remitting your own quarterly estimated tax payments to the government because you don’t have an employer to take care of it for you.

50% for Needs

Half of your income goes to needs. This can include house, utilities, groceries, transportation, prescriptions, and other health care costs. Paying on your credit card debt can be considered a need as well as car payments because your credit score gets impacted with every payment you miss. There is also childcare costs and alimony which are needs as well.

The above list can include any number of things that you are required to pay every month that is essential for your world to keep functioning. If you are trying to balance your budget and if you remove something in an effort to save money, you can ask yourself, “what sort of impact will this have on my life if I do not have it?” If it is essential for your wellness, turning off the water to save money is not a want it is a need whereas your cell phone can be a want if you have it just to watch YouTube, but if you use it for your job at all does it become a need? The question you need to ask yourself is how are you using your item and can it be downgraded to a more basic plan if that will work just as well for your needs.

There are many such things as cell phones that are classified as needs but are really wants. Do you really need your cable or that morning cup of coffee from Starbucks? Is there a way to make it more affordable such as scaling back your cable to basic channels only or making your coffee at home? It is amazing what money you can find through a few small changes. Part of it is being honest with yourself for the reason you have something as it is.

30% for Wants

30% of your take-home pay can be allocated to wants. These are not needs. A want is anything that you can survive without such as your Netflix account, a vacation, cable or that gym membership, or that weekend shopping trip.

It becomes more difficult when wants cross into needs such as going to the salon for a cut, dry and style. You need to look presentable for work, but do you really need your hair dyed for it? You need your car, but do you need to lease a large car that will consume more glass instead of an economy-sized car?

The 50/30.20 budget put more money into your wants rather than savings. You can alter your budget plan if your goal is to pay down debts or grow personal wealth.

20% for Debts & Savings

20%of your income should go to your savings and paying off your debts. Setting money aside for your savings is included in your retirement funds, emergency funds, and financial goals. It is advised you put money into your savings and take whatever is left over to pay your debts because you will need whatever you save later for whatever life may throw at you as well as for retirement.

Debt can include anything that holds a balance that you need to pay on regularly such as your student loans. This can also fall into the needs category and whatever else you have leftover should go to your savings where it can do some good for future plans and retirement.

To put all of this into perspective, here is an example,

Let’s say your total take-home pay each month is $3,500. Using the 50-30-20 rule, you can spend no more than $1,750 on your needs per month. You probably can’t afford a $1,500-a-month rent or mortgage payment, at least not unless your utilities, car payment, minimum credit card payments, insurance premiums, and other necessities of life don’t exceed $250 a month.

If you already own your home or you’re locked into a lease, you’re pretty much stuck with that $1,500 payment. Consider relocating when your lease expires to make your budget more manageable or take a look at your other “needs” to see if there’s a way that you can reduce any of them. Maybe shop for more affordable insurance or transfer the balance on that credit card to one with a lower interest rate so your minimum payment drops a bit.

You can spend $1,050 a month on your “wants” based on that $3,500 you’re bringing home each month. You might consider doing without a few things and shifting some of this money to your “needs” column if you’re coming up short there—not necessarily indefinitely but until you can get your needs down to a more manageable level. Remember, you still need 20% leftover so you can save and pay down your debts according to the 50/30/20 plan. 

Read Also: 7 things to do in Preparation for a Recession

Now you have $700 left, that last 20%. You know what to do with it. Pay down on debt, save for an emergency, and plan for your future.

Final Thoughts

The 50/30/20 plan is a place to start your budget. If your goals and finances do not fit this model try others until you can balance your budget to the best advantage you have for your future and what you want it to become. Some parts of it can be carried into other plans such as set aside at least 50% of your income for your needs because costs for those don’t always stay the same such as the costs for food which fluctuates.

If you are debt-free you may consider your options differently. You can allow yourself more wants to save and/or invest more if that is the way you want to use your money. You can also contribute parts to charity to help others or take up a new activity. They to this entire plan is to balance your income with what you need to keep your life going forward.

Tips

• Having a savings account is the first step to planning your budget as it is the best place to place to put any excess cash. You can also compare savings accounts across banks and credit unions to find the best rates for your money.

• Freelancers or people that work part-time have a terrible time because of low or irregular paychecks and some find it impossible to do more than what they are doing. If you are in this boat you may want to look budgets aimed at irregular income levels.