The 50 20 30 Budgeting Trick- Master Budgeting for a Lifetime

Budgeting can be a tough skill to master. What works sometimes won’t work other times. Creating a budget is one thing, but sticking to it is another. The 50 20 30 budget trick is designed to create a budgeting system that will always work! It’s simple, but effective.

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What is 50 20 30 budgeting?

The 50/20/30 rule was popularized by Elizabeth Warren, in her book “All Your Worth: The Ultimate Lifetime Money Plan”. As the title suggests, this budgeting system is used by so many people, all with different income levels, different amounts of debt, and different financial situations.

BUT, often times people categorize their purchases incorrectly, leaving the budgeting system less effective. You’ll be surprised to see how changing these few things can help your budget dramatically.

If you are the type of person who likes to really see what they’re working with, we recommend this budgeting binder. It’s cheap and does everything you need it to!

How does the 50 20 30 budget work?

In a nutshell, this budgeting system works by dividing out your net income into three categories; needs, wants, and savings. 50% to your needs, 30% to your wants, and 20% to your savings.

To do this effectively, you need to do two things:

1.Determine your net income – Your net income is what money you have left after taxes have been taken out; your take home amount.

2. Categorize all of your expenses into one of the three categories; needs, wants, and savings. However; you need to categorize them correctly. This is where most people aren’t using the system correctly.

Needs (50%)

Your needs are things you can’t live without. And no, your cell phone does not count as a need. Here are some examples of things that should be in the “needs” category:

  • Mortgage/Rent
  • Insurance(car/health)
  • Utilities
  • Groceries
  • Minimum payments on debts (sidenote: the important part about this one is to remember the word minimum… we’ll take about making extra payments later on!)

To make this work, you want to make sure these things only total up to 50% of your net income. While it’s not so easy to make more money, it’s much more doable to decrease your spending. Just because these are needs doesn’t mean they’re not adjustable.

For instance, you can always find a way to cut down, or save money on groceries. Check out our in depth article on saving money on groceries. You can also shop around for lower insurance rates, move to somewhere that has cheaper rent, be conscious about electricity and gas, try to avoid driving when it’s not absolutely necessary.

Wants (30%)

Your wants consist of things that you desire, but it won’t cause you too much distress to remove from your spending. Here are some examples of some common wants:

  • Going out to eat
  • Cable and TV services
  • Internet
  • Brand new cell phones
  • Cosmetic specialties (hair, nails, expensive make up, etc.)
  • New clothes
  • Costly activities and entertainment

The “wants” category can be difficult to divvy up. A minimal amount of clothing is necessary. A hair cut could be categorized as a need. For some families, maybe internet and cell phones is a need because a family member works from home.

If you’re wanting to save money, or your “wants” category is exceeding 30%, your best move is to cut down on the wants that you can do without. But most importantly, including your wants in the most affordable way.

If you need a haircut, go somewhere cheaper, like a beauty school. Need new cell phones? Buy the last model rather than the newest release. Go out to eat at cheaper restaurants, share a meal, and order to go to avoid spending the extra on a tip. Use Netflix or Hulu and avoid cable. There are so many ways to tweak and adjust the wants category.

Savings (30%)

Savings is the important (and slightly more confusing) category. Of course, any sort of money you’re wanting to put away into savings is going to be in this category. BUT, paying down on debt will also be in this category. The tricky part is that your minimum payment on things like your car, mortgage, credit cards, etc. is under your needs category. Any extra amount of money you’re putting towards debt that exceeds the minimum amount goes into the savings category. Some examples of things that belong under the savings categories are:

  • Emergency savings account
  • Specific savings accounts such as a vacation fund, home/car repair, fun money, etc.
  • Retirement account
  • Investments
  • Debt payments that exceed the monthly minimum payment amount

Something really important to remember about this budgeting system is that you CANNOT skimp on the savings. Savings are necessary for a lasting budget. Why? Because unexpected things happen. You don’t know when your car is going to need a repair, or your water heater goes out, or you end up in the hospital and you need to pay your health insurance deductible.

And what happens when you don’t have savings to cover these charges? You resort to using credit cards, which then increases your debt and forces you to add extra expenses into your needs category. Savings accounts will SAVE your butt when times get tough, and tough times are inevitable.

Next Steps

Now that you’ve been educated on the 50/20/30 rule, you can implement it!

1.Determine your net income – Go through your current spending habits, and determine what percentage of your money is being spent in each category. This will help you see how far off of this budgeting plan you currently are.

2. See what you can change – limit your needs to 50%, your wants to 30%, and your savings to 20%.

3. Make a plan to make those changes – Some of them may take time. You may not be able to move to a cheaper place until your lease is up. Or you may not be able to go from spending your normal amount on groceries, to a dramatically cheaper amount without some trial and error.

One of our specialties here is living frugally, and working to save money on your needs AND your wants. Here are some articles that are guaranteed to help you adjust your spending so that you can get your 50/20/30 budgeting system working perfectly:

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