Budget categories, recommended percentages, automated payment schedules, savings challenges, and the list goes on. Budgets get a dirty rap because they often seem complicated and boring. The truth is budgeting is essential to surviving life. Money is the one thing that connects us all, regardless of size of income, gender, culture differences, where you live, and if you are on Facebook or not. We either have money or we don’t, that makes us connected.
One of the simplest ways to set up your budget is to follow the formula found in Financially Fearless *, the 50/20/30 budget. Sounds complicated, doesn’t it? It is not at all as complicated as it sounds; in fact, I believe it makes budgeting a whole lot easier.
50 percent is for your essentials
20 percent is for your future
30 percent is for your lifestyle
Let us break this down a little further.
Your essentials are what you need to survive. Essentials are your food, shelter, and transportation to work (in order to earn money to provide for the essentials). Fifty percent of your total monthly income should go towards your basic survival needs. This is why it is imperative that you avoid overpaying on your home and car, as they will eat up too much of your fifty percent leaving you with little room for groceries. Make sure when you budget this category that you are not overpaying on your utilities every month, as that too will eat up too much of your fifty percent.
Here is an example of what your budget for your essentials could look like if your total monthly income is $3,000:
Total to apply to essentials: $1,500
Car Payment: $300
Your future is your debt repayment, emergency fund, investments, and your retirement savings. How you decide to allocate twenty percent of your total monthly income to these categories is depended upon where you are in life and what your financial goals are. For example, if you are attempting to pull yourself out of debt, a huge portion of your twenty percent is going to go towards your debt repayment plan. If your retirement account needs a little love, a large portion of your twenty percent will go towards your 401(k) or IRA accounts.
Your lifestyle consists of the things that you enjoy spending money on like travel, eating out, gifts, and shopping. This category is the first to go when you are in financial trouble, do not get caught up in the thirty percent outweighing your future. This account is intended to make living life fun but it will not be enjoyable if you are struggling to pay your monthly bills. Before planning out this category of your budget, make sure your essentials and future are balanced out before you play.
How you decide to divide the individual categories is up to you. You could set up to allocate twenty percent of the fifty percent towards your mortgage or rent payment every month. These individual percentages will look different for everyone. Personal finance is personal and although money connects us, it works differently for each of us.
Have you ever used the 50/20/30 budget framework before?
Don't know how to make a budget?
No problem! This simple and easy-to-use guide is perfect for beginners! It'll walk you through step-by-step in creating a budget for the very first time.