The 50/30/20 Budget: What It Is and Why You Need It
When it comes to your finances, do you take a head-on or head-in-the-sand approach? If you identify with the latter, then the good news is, you're not alone. The bad news? You're not alone. New data suggests that when it comes to managing money, women are not as independent as you'd expect. In fact, 91% of women in couples are not participating in financial decisions. But we want to change that statistic. To help you become a master of your own finances, we're debuting a new series called The Paper Files, where we uncover tricks and tips that will help you manage your money and your future. Ready to take it head-on?
Original Illustration by Stephanie DeAngelis
Knowing how much to budget and which areas to budget for can be murky waters to navigate. The amount financial experts recommend distributing toward a savings account can either be overly complicated or flat-out unrealistic. This is where the 50/30/20 budget can help smooth out some confusion. The process is straightforward: Put 50% of your net income (or take-home pay) toward the essentials, 30% toward personal spending, and 20% toward savings. Keep reading to learn more about the 50/30/20 budget and how it can help you get a clearer understanding of your expenses.
50%: The Essentials
The biggest chunk of your income is going to go toward essentials. These are necessities that you can't avoid budgeting for. What falls under the umbrella of being an "essential"? Essentials cover your housing, food, transportation, and utility costs. Everyone will spend within these categories differently. For instance, if you're a driver in Los Angeles, you'll likely spend more on transportation than someone living in New York who uses the subway. How you negotiate within this 50% is up to you, but half of your net income should remain after the essentials are taken care of. Following the 50% rule will provide you with an excellent benchmark for living costs, like housing and transportation.
30%: Personal Expenses
This category may end up being a little less exciting than you imagined. Although miscellaneous purchases and "fun" money fall under personal expenses, it also includes certain categories you may consider an essential, like your cell phone and cable bills. Keep in mind that this is absolutely the most negotiable of the three categories. The more you skim here, the more you can put toward the next category. Which brings us to…
… the almighty savings account. This group receives the lowest percentage, but it is absolutely the most essential. After the essentials are taken care of—and before personal finances are considered—savings should be taken care of. This is the goal-oriented section of the three budgets. If your job allows you to funnel part of your paycheck into two different accounts, then this is a great way to apportion 20% of your take-home pay toward your savings without having to think about it. However, this category doesn't consider only what's directly deposited into a savings account. Paying down existing debt and adding to investments also counts toward this 20%.
Did you know you can save $3000 a month without even noticing? Read our tips for saving $100 every day by cutting small expenses.