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.
50% Essentials
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.
20% Future
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):
How to Pay off Credit Card Debt
How we paid off $5,000 of debt in one month
Should you refinance your student loans?
Do you have an emergency fund?
How to stop the paycheck-to-paycheck cycle
30% Lifestyle
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.
JOIN THE CHALLENGE!
Money controlling you? I know the feeling. My family has been living this real life on a budget for a long time and I can tell you that there's never a perfect season, but with a few changes you can start to reign in your money issues.
Join the 5-Day Challenge today and start getting your money life in order this week!
Becca says
We try to save half our income. It isn’t too hard for us. We don’t have expensive tastes or hobbies, though we like to travel and we are still working on a few more renovations at home.
As a financial planner I know a lot of people worry about retirement, but it’s important to note that you don’t need to have a huge chunk of cash in the bank. Build up your investments and make your money work for you. Don’t forget to account for any work or government pensions you may receive, and take advantage of programs that match all or part of your retirement savings. Remember too that your costs in retirement will be less as you will (hopefully) not have a mortgage or other outstanding debts, and you will have fewer expenses (no teens eating you out of house and home, no having to drive to work every day, etc.) There are plenty of great online retirement calculators to help get you started with a savings plan.
Sandie at Fulfilled For Less says
I love simple methods of budgeting! I believe it makes it much less intimidating for the beginner, yet still effective for everyone in their budget journey. I look forward to sitting down one day and seeing how the 50/20/30 budget works for our family.
Mrs. Daisy @ Dirt Road Daisy says
As we are trudging through our debt free journey, Lifestyle is something we budget very little for. Unfortunately, a large chunk of our income goes to paying and overpaying on debt. I think that once we hit a more comfortable financial situation, we will definitely try out the 50/20/30!
Erlene says
This is great to have it all broken down like this. Thanks for sharing your method on Merry Monday.
Erin @ View From Our Terrace says
I used to keep track of percentages for our budget and then sort of stopped. We are still working on cutting expenses and paying off debt, but it will be interesting to go back and see where we fall in these percentages. Great post!
Also, love the new site design!
rhonda says
Thanks for all your helpful advice.
I live in Canada, and get paid every 2 weeks, over 26 pays, and at the end of the month I cash my alimony check.
Do you set up a 50/20/30 budget the same way?
Sadly in Canada, capitol city rents are quite atrocious.
I also help my adult son with 400-500 a month…(yikes)
Thanks.
Jessi Fearon says
The 50/20/30 budget is based on monthly income so you would factor in the amount of paychecks that you’re expecting for that month to allocate it out into the 50/20/30 framework.
Kimm at Reinvented says
That’s really great advice….especially the 20% for future.
Thanks for sharing at Funtastic Friday.
Yvette Thillens says
Just wanted to send you an FYI— the link to the “Should you refinance your student loans?” goes straight to a malware warning page. Not sure if there is an updated link…
Also, thank you so much for your site. It has been an inspiration and, as we are at the point of needing to re-think our retirement, maybe this will be a starting point for my own blog 😉
Jessi Fearon says
Thank you so much Yvette for letting me know! I accidentally left off part of the link! I’m so sorry for that – everything should be working right now. 🙂