Oct 12, 2018
What is the 50-30-20 Budget? Understanding This Easy Budget
It may be the easiest budget you ever make.
Budgeting is important. Yet, only around 40% of Americans actually use one, according to industry data.
What’s with the disconnect?
It could be a general lack of financial literacy, or that many people simply don’t know how to create a budget. If you weren’t taught how to create one in high school or college, you may have never gone out of your way to figure it out.
A good place to start is with the 50-30-20 budget—it can take the pain out of the process, even for those who’ve never made a budget before.
What is the 50-30-20 budget?
The 50-30-20 budget is a simple, yet effective budget that breaks down your expenses into three categories: “needs”, “wants”, and “future”.
The “needs” category ideally comprises 50% of your monthly budget and is devoted to the expenses you must pay every month. Another 30% is allocated to “wants,” or non-essential expenses. The final 20% of your budget should be allocated to investing or saving.
The beauty of this budget is that it can be created with relative ease. You just need to calculate and properly categorize your expenses. It’s a plug-and-play budget.
50% of your budget goes to “needs”
In case you haven’t caught on, the “50” in the “50-30-20” represents 50% of your post-tax monthly income. So, half of your income is budgeted for necessary expenses.
What are the necessary expenses? One example is housing costs, like rent or mortgage payments. Other examples include groceries and transportation costs.
You’ll also want to throw in debt payments (credit card payments, student loan payments, etc.) as well as essential bills, like utilities.
Your “needs,” or necessary expenses, are often the largest monthly expenses you incur. For example, rent or mortgage payments may account for the largest portion of your monthly budget.
30% of your budget goes to “wants”
With your necessary expenses properly baked into your budget, it’s time to move on to the “wants,” or non-essential expenses—although the line between the two can sometimes be hard to define.
For example, an iPhone is not essential to survival. But you probably do need a mobile phone—maybe not the latest top-of-the-line model, though. Can you do with something cheaper?
There are other expenses that you can trim down, too.
Perhaps you’re eating out at restaurants too often when you could eat home sometimes or pack a lunch. The same goes for trips to the movies, your Spotify subscription, and Amazon shopping binges.
Again, these expenses should add up to no more than 30% of your total budget, and many folks find that they’re spending much more than anticipated when they sit down and comb through their bank statements.
The final 20% of your budget should be saved
You’ve budgeted for your necessary expenses and your non-essentials. Now, it’s time to think ahead.
The final 20% of your budget should be dedicated to saving and investing, for both short and long-term goals.
It’s recommended that everyone create an emergency fund with up to six months’ worth of expenses. That’s so you won’t have to struggle if the car breaks down and you need to fix it, or you’re saddled with an unexpected medical cost.
Once you have some safety reserves, you can save for other goals, like a down payment for a house, or a wedding.
Saving for retirement is also something you should consider. Most experts recommend at least 10% to 15% of your monthly income for your retirement. And the sooner you start, the better, as your retirement savings can benefit from the power of compounding.
How the 50-30-20 budget can save your financial life
Again, budgeting is incredibly important, and having an easy approach to budgeting, like the 50-30-20 budget, is one way to make it a habit.
Once you have your budget in place, you may find that you want to “impulse-save,”rather than impulse-shop. Getting started is the hardest part.
With time, your budget will likely evolve, too. “Needs” will become “wants”, and your savings goals will change as well. You just need to be willing to roll with the punches and stay disciplined.
Stash is making it easy to stick to your budget. We have a debit account launching this fall with zero set-up, monthly, minimum balance, or overdraft fees.¹ Plus, daily spending guidance and smart transfers to help you keep more of your money².
You can reserve your spot for the debit account today.
If you aren’t a Stash investor already, you will need to download the app and register for a Stash Invest account. Then you will need to sign up on the waitlist to apply for a Stash Debit Account. Account Opening for Banking is subject to Green Dot Bank’s approval.
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