There is an ample number of people in the world who absolutely despise the term “Budget”.
To be honest, I did too!
And as much as used to hate budgeting myself, I’ve realized over the course of a few months that how important and useful a good budget is in managing your finances.
Why do people hate budgeting so much?
Because, Budgeting Sucks!
No one really wants to do it, it is hard to stick with and for the most part, it feels like a chore.
What most people don’t realize is that following a good budget really helps your money situation in a long run.
Just as we and our circumstances are very different from each other, there are different budgeting types too that suits different people. There might be particular budgeting method that works for your friend but not for you and vice versa.
If you find that a Zero-Based budgeting method does not work for you, then the 50/30/20 budget might be a perfect solution for you.
The Introduction Of 50/30/20
Elizabeth Warren—Senator from Massachusetts and also named by Time magazine as one of the 100 Most Influential People in the World—introduced the term “50/30/20 rule” for spending and saving with daughter, Amelia Warren Tyagi.
They together published a book in 2005: “All Your Worth: The Ultimate Lifetime Money Plan. Here’s how Warren and her daughter recommend you to use the rule!
How Exactly The 50/30/20 Budget Works?
Let us take an example of a household of net income of $5000 per month:
First off, 50% Needs
The idea here is to spend NOT more than 50% of your after-tax income on essential stuff.
To start with, you need to set aside 50% of what who make in a month after excluding all the taxes applicable with your income. If you’re self-employed, your after-tax income will be your net income (Gross income minus the business expenses).
The “Needs” category includes all the items and commodities you need in your life no matter how much money you make. Which might consist of food, clothes, mortgages/housing rent, transportation etc.
Here’s a rough (not to actual scale) breakdown:
- Mortgage/ rent = $900
- Groceries = $500
- Veheicle = $300
- Clothing and cleaning = $100
- Utilities = $700
TOTAL= $2500 (50% of $5000)
This 30% is your Fun-Money!
Which might include stuff like entertainment, dining out, cable/Netflix subscription etc. We all need some sort of fun in our lives to look forward to, we do. This 30% will fund those fun part. The idea here is to spend less or equal to 30% of your take-home income.
One thing to keep in mind is that if you’re inches away from going broke or want to save money really bad, this 30% is the key. The less you spend on the “wants”, the more you’ll be able to save.
This is where you’ll be able to scrape a few extra bucks to save for later.
The 30% breakdown:
- Entertainment (Cable/Netflix, Internet) = $300
- Eating out = $150
- Coffee = $50
- Shopping = $400
- Fun For Kids = $200
- Hanging out: $200
- Others = $200
TOTAL= $1500 (30% of $5000)
Once you’ve covered all the essentials and wants, the rest 20% of your income goes directly to “Saving”. This is very important for various reasons.
Suppose you’re saving money as an emergency fund or retirement. Make sure to set aside to cover those future expenses. You’ll thank yourself later!
The 20% breakdown:
- Emergency Fund = $500
- IRA Savings = $200
- Others = $300
TOTAL= $1000 (20% of $5000)
Other helpful money saving articles-
- 10 Things Frugal People Don’t Do, Ever!
- 12 Work From Home Jobs to make $10k a month
- Personal Finance Hacks to make you rich
Essential Budget Management Tools:
1: Ebates – Ebates allows you to save some good money every single time you shop online, Every time! And Ebates is totally free which make it even more prominent. A lot of people shop online not knowing that they can save a hell lot of cash while shopping using Ebates.
Sign up for Ebates here.
2: YouNeedABudget – “You Need a Budget” is an automated budgeting app (and now web-based too). YNAB helps to create a sense of control over your money rather than just tracking the flow of cash in and out of your account.
It also helps you to get on track with your budgeting game with online courses and several other helpful information.
3: Trim – Trim is an automated tool that helps you even more for your financial life. It is easy to set up with very little hands-on maintenance.