Living in this world, money is vital. You simply need money to live. While opportunities are unlimited, money is limited it. Most of us have to have a budget for our money and spend it wisely so that we don’t go bankrupt but still have enough to live a prosperous life.
Having a fulfilling life is, I believe, not about having millions of millions of dollars, but it’s about being smart with money you currently have.
When it comes to budgeting, do you think of an ideal budget breakdown?
If you already have a method and are doing well, that’s great! Keep up the good work! And if you could share it on the comment, it would be wonderful.
If you are having a hard time budgeting and often worry about money, or if you want to take full charge of your own money and build some wealth for the future, the 50/30/20 budgeting method could help you.
There are many good budgeting methods out there, but the 50/30/20 budgeting method is especially effective because it allows you to visualize your budget and clarify how to allocate your money in concrete numbers. With this method, you can truly start to control your money and enjoy spending it without worry.
what is the 50/30/20 budgeting method?
50/30/20 budgeting method is introduced by Elizabeth Warren & Amelia Warren Tyagi in the book called All Your Worth – The Ultimate Lifetime Money Plan.
It was designed to help you balance the money you have and achieve lifelong financial independence.
Under the 50/30/20 method, your pure after-tax income is divided into 3 categories: 50% to needs, 30% to wants, and 20% to savings and debt payments. Pure after-tax income means income only tax have been deducted. If your employer deducts health insurance, 401(k) or other automatic savings, you add back them to the after-tax income.
Here are the details of each category.
50%: must-haves (Needs)
Must-Haves (Needs) are the expenses you cannot live without paying. The items include:
- Housing (rent or minimum mortgage payments)
- Basic utilities (electricity, water, sewer, gas.)
- Basic telecommunications (phone, internet)
- Groceries
- Transportation (car payments including gas, public transportation costs for commuting)
- Medical care
- Insurance (health, car, home, etc.)
- Minimum debt payment (credit card, monthly student loan payment, etc.)
- Other obligated expenses that need to be paid monthly. (day-care, etc.)
30%: Wants
Wants are extras, mostly for fun, the things you WANT but don’t necessarily NEED. Sometimes, it’s difficult to draw a fine line between Must-Haves (Needs) and Wants, but basically, Wants include:
- Eating out
- Entertainment (movies, concerts, other paid events)
- Vacations
- Shopping (for your self and/or someone else.)
- Subscriptions (Cable TV, Streaming services, etc.)
- Temporal baby sitting cost so that you can go out.
20%: Savings and Debt payments
Savings and debt payments are the money to prepare for the future. A chunk of money is often needed as life stages change. And debt is the money you are obliged to pay off. It is important to save and pay off the current debt systematically in order not to take on another debt and incur unnecessary interests otherwise. Items in this category include:
- Emergency fund (At least 3 months of your salary is ideal)
- Contribution to retirement
- Investment
- Additional debt payment to the minimum payment
As you can see, the 50/30/20 budgeting method lays the foundation for money management. It focuses on the money you have NOW. Of course, each person or household has a different amount of money, but this method can be applied to every individual and household, regardless of how much money they have.
Only when you are able to manage the money in your hands, will you be able to build or increase your assets.
Why is the 50/30/20 rule a big hit?
Even though it has been more than 10 years since its publishing, the book still gets good reviews on Amazon. Why? Because the 50/30/20 method introduced in this book is effective regardless of the time period. And it’s very simple to follow, but provides huge positive effect.
When things get complicated, it is said that it’s important to go back to the basics. The 50/30/20 budgeting method is the basic you can go back to when your financial situation gets complicated.
The 50/30/20 budgeting method Step-By-Step application
To utilize the the 50/30/20 budgeting method to the fullest, first you need to know how much you have available, then find out your actual spending, and finally analyze the gap between the ideal budget (50/30/20) and actual spending. If there is a negative gap, consider whether your spending on each specific item is reasonable. For example, do you need to have a full spec sports car when you just need a basic sedan? (improvement in Must-Haves) Do you need to have cable TV? (improvement in Wants?)
- Calculate your monthly “after-tax” income.
The 50/30/20 method starts with your money on hand, which means total income after tax you make per month. If your employer deducts insurance premiums or pension contributions, add them back to the after-tax income. - Calculate the percentage you are spending on Must-Haves (Needs).
Total amount you are spending on Must-Haves (Needs) ÷ After-tax income × 100.
Automatic insurance deduction goes here. - Calculate the percentage you are spending on Wants.
Total amount you are spending on Wants ÷After-tax income × 100. - Calculate the percentage you are spending on Savings and Debt Payments.
Total amount you are spending on Savings and Debt Payments ÷After-tax income × 100.
Automatic pension contribution deduction goes here. - Analyze the gap between the ideal budget and your actual spending.
Are you spending more on Must-Haves? Are you spending more on Wants? Or are you saving unnecessarily a lot that it’s affecting your Must-Haves and Wants? If there is a negative gap in any of the categories, analyze more on your spending and find out where you can cut the expense.
The 50/30/20 budgeting method has completely changed my perspective towards money. My worries for finance are gone. I wish I had known about it sooner in life so that I wouldn’t have had to struggle managing my finance for so long. This method is so simple and easy to follow. And it works well no matter which phase of life you are in. Now I’m married and the household finance is getting more and more complicated, but I am sure that this method will help me and my husband from now on as well.
What is your perspective on budgeting?
Do you use any budgeting method that works well?
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