One of my most popular posts, is one on the 50/20/30 budget breakdown. Now, I didn’t create this formula, it’s from an awesome book called Financially Fearless by Alexa von Tobel. But it’s an easy way to set up a budget if you don’t know how.
Here’s how the formula works:
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.
Here’s the breakdown on how your 50% should work:
< 30% should be your rent/mortgage payment every month
≤ 5% should be your utilities (power, water, natural gas, etc.)
~ 10% should be for your groceries.
~ 5% should be your transportation costs (after all, if you can’t get to work, you can’t afford your essentials). You’ll want to calculate how much you’re spending on gas, maintenance, or subway or bus fare.
Now, what if you’re going – “but we spend way more than 10% on groceries!!!”
Before you freak out, take the time to calculate all the percentages from above. The reason being is that you may still be well under the 50% living essentials part of this formula because your housing is only 20% of your income and your utilities are less than 5% so therefore, you can afford to spend a little extra than the 10% on groceries every month.
The point to this example is to get as close as possible (but stay under) the 50% total for your essentials. It doesn’t have to be perfect.
Your future is your debt repayment, emergency fund, investments, and your retirement savings.
How you decide to allocate the 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.
Something I’ve learned when it comes to retirement is that you need to estimate that you’ll need to replace at least 70% of your current income to stay above water when you retire.
Did you just freak out? Because, yeah, we ain’t there yet but hopefully you are.
So let’s say, you make an annual salary of $50,000 a year. That means your retirement salary needs to be at least $35,000 a year but because of inflation, you’re really going to need $84,954 a year. Soooooo, your target nest egg is…. $1,263,903!!!!!!!!
So guess in case you weren’t convinced to save for retirement or pay off debt or save money, hopefully that just shocked you enough to motivate you like it did me.
Here are some more posts on paying off debt and saving an emergency fund (I’ll write more about retirement as we get this part of our financial journey figured out):
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 so don’t get hung up on the fact that this category outweighs the your future.
This category 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.
It’s totally okay to spend money so long as you have the room in budget and the 50 and 20 part of this formula are taken care of first. Part of this lifestyle category is learning to spend your money on the things that really matter.
In other words, would you rather spend that $12 every day for lunch or save that $12 so you have enough by the end of the year to take a vacation? The answer is totally up to you, you just have to know where and how to spend your 30% so you’re living the life you actually want to live.
Have you ever used the 50/20/30 budget framework before? If not, hopefully this will help give you a “go-by” when figuring out the different components of your budget.
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