How the 50/20/30 Budgeting Method Can Help You Reach Your Financial Goals
If you’re on a variable income, budgeting can become a little more complicated. Even if you aren’t, figuring out how much you need to set aside for each area of your budget can often feel like little more than guesswork. This is where the 50/20/30 budgeting method comes in, allowing you to easily create a budget that works no matter what your income looks like.
What is the 50/20/30 Budgeting Method?
The 50/20/30 budgeting method divides your income into three categories: essential expenses, financial priorities, and lifestyle choices. In this method, 50% of your income is allotted to essential expenses such as food and rent. 20% of your income is allotted to your financial goals. This includes priorities such as saving for retirement or putting money away in a rainy-day fund. 30% is left over for you to spend on lifestyle choices such as eating out, vacations, and entertainment costs.
This budgeting method is great for two reasons. 1) It is flexible. No matter what your income for the month is and it can be adjusted. If you don’t need all 50% of your income for essentials you can apply the remainder to your savings. Second, the 50/20/30 budgeting method works well because it places a lot of emphasis on financial priorities. In the end this helps you stay on track to meeting your financial goals.
How to Implement the 50/20/30 Budgeting Method
Keep in mind that the 50/20/30 budgeting method is not a comprehensive budgeting plan. You will still need to figure out a way to track your expenses and manage other day-to-day budgeting tasks. The good news is though, that the 50/20/30 budgeting method can be combined with other budgeting strategies. The zero sum budget in order to provide you with a comprehensive budgeting method.
To start using the 50/20/30 budgeting method, you will want to divide your income for the month into three categories. By calculating the amount you will have for each category and either physically setting those amounts aside either into separate accounts or mentally setting them aside and keeping up with how much you’ve spent in each one. If you are operating on a fixed-income, doing this will be easy as you will know how much you make in a month’s time and can divide it accordingly.
If you are on a variable income, you will want to use a budgeting strategy such as the zero sum budget in order to project your income for the month and then divide it according to the 50/20/30 rule.
Once you’ve divided your income up, you can adjust it as necessary, though sticking to the 50/20/30 budgeting method requires that you not do things such as draw money from your financial priorities to use toward lifestyle choices. Instead, one acceptable adjustment is to put money that is left over from the 50% essential expenses category into the other two categories. Hopefully 50% of your income will always be enough to cover your essential expenses, but if necessary you can draw from the other two categories to make up the difference.
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Try to always stick to the 50/20/30 division though, and watch as this simple yet effective budgeting method helps you reach your financial goals.
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