A budget is a tool you can use to help you manage short-term needs with long-term financial goals. It provides a template you can follow by entering your income, debts, and other spending, and then use as a guide to help you identify where to portion your funds moving forward.
However, when you’re just beginning to use a budget to manage your income and expenses, it can be helpful to keep it simple. Starting with a budget that feels too restrictive or complicated might distract you from the purpose of your budget and discourage you from being proactive with your money management. That’s why the 50/30/20 budget method has been a useful tool for so many. It’s a straightforward, high-level structure that you can use to help make quick decisions and adjustments as you go.
Let’s talk about how this method works, and how it can work for you.
The Three Categories of the 50/30/20 Budget
50% for Needs
In this budget method, the largest portion of your income goes to the non-negotiables: things like housing (whether you rent or own, and related insurance coverage) and utilities, transportation (including gas and insurance), groceries, and health insurance. This also includes minimum debt payments and other obligations that affect your credit health.
Think about it this way: what are the basic things you need to live? That should make up half of your budget. If your needs make up more than 50% of your budget, you may need to make more significant changes to your lifestyle if you want to follow through on longer-term goals.
30% for Wants
You might be asking, well, what’s the difference between what you need to live and live comfortably? That’s where the next 30% of your budget comes into play.
Your “wants” are those things that enhance your quality of life but aren’t essential to get you from day to day. These could be one-off purchases, such as new running shoes or dinner out with friends, or recurring expenses, such as gym memberships or streaming services.
This 30% is critical, because it helps you helps you moderate short-term comforts without sacrificing your long-term financial progress. If you’re regularly spending more than 30% on “wants,” you can consider reorienting your spending or saving for pricier but less frequent nice-to-haves.
20% for Long-Term Goals
The remaining portion of your budget is off limits for spending. Why? Because you’ll be setting it aside as savings, putting it toward debt repayment, or, if you’re more comfortable with risk at this stage in your financial journey, using it to invest.
As you consider how to allocate this 20%, think about the following goals:
- How much do you have in emergency savings? Is it enough to cover you for several months if your financial situation were to change?
- What kind of high-interest debt (i.e., credit cards or personal loans) are you currently managing?
- What is your student loan repayment plan? Could you refinance your debt in order to better manage payments or pay off your debt sooner?
- What big-ticket purchases do you foresee for yourself in the next 1-2 years?
- How can you maximize your retirement accounts, either personally or through your employer?
This 20% of your budget plays an important role in building a strong financial foundation. If you can consistently commit to using this amount toward your financial goals, you could potentially make a significant improvement to your debt-to-income ratio and credit, not to mention create greater opportunity to build wealth for you and your family.
Learn More: Compare this Method to the 60/30/10 Budget
Adapting Your Budget to Your Life
With any budget, it’s important to be realistic as well as aspirational. Go back a couple of months and plug in your income and expenses to your budget of choice. Did you spend more than you wanted to, or put less than an ideal amount toward your savings? Based on this reflection, see what changes you might consider making moving forward, using your budget as a kind of guardrail to help keep you on track toward your goals.
Your budget should be a resource to empower you toward financial health, so if budgeting begins to feel more stressful than helpful you may need a different tool or more structured support with your finances. Explore how personal banking products and services may help you manage your finances, and don’t hesitate to seek professional financial advice. For most, it’s never too early to create a plan toward your goals and never too late to improve your circumstances.
Ready to get started? Try out SouthEast Bank’s free interactive budget calculator now!
