The 50/30/20 Budget
Yuck, budgets. One of the only words that I can say that will cause my wife to instantly switch rooms.
It's almost as bad as when I ask my daughter if she wants to change her diaper. I love budgets and look forward to sitting down once per month to see how our household is doing - but maybe that's just me.
The 50/30/20 budget is one of the most popular and simplest budgets to get your finances in order. Not all budgets are created equal, but the 50/30/20 budget can be set up in minutes and is extremely flexible to your situation.
Essentially your entire financial existence is broken down into three categories:
50% needs
30% wants
20% savings and debt management.
Everyone's situation is different, but these are great numbers to strive towards.
When my wife and I first married and started budgeting, we heavily skewed towards the needs column. Rent is expensive, right?
Over time though, we were able to slowly shift our focus to the other categories. Just take it one day at a time.
To see how this works, let's say that your monthly household income is $5,000. Each month, you would allocate $2,500 to necessities, $1,500 to wants, and $1,000 towards your savings goals.
Easy enough right? Let's break it down a bit more.
Needs (50%)
A "need" is something necessary for survival, to prevent future harm to your finances.
These are your basic needs, such as food, shelter, and medical expenses. Needs should take up 50% of your budget, nothing more if you can help it.
Easier said than done of course, especially if you live in a high cost-of-living area. Add on Parenthood and you quickly see how difficult this gets.
Ever hear the saying "being eaten out of house and home?" This is a reference to something scarier than zombies…children. They are bottomless pits and it just gets worse the older and bigger they get.
Another example of a need is the minimum payment for your credit card bill. By missing the minimum payment you are harming your finances in more ways than one. Not only will you owe more in interest next month, but the missed payment could end up on your credit report and lower your credit, leading to lower rates in future purchases.
Wants (30%)
A "want" is something you desire, but don't necessarily need. Think extravagant clothing and your bar tab.
Before my daughter, the biggest expense for my wife and I in this category was vacations. We'd cut costs all year just to save enough to get out of town for a couple of weeks each year.
Decide what's most important to you and save your money for what you want the most.
We trade our limited time to work for our money, so spend it wisely. There are many ways to save money, including meal prepping and carpooling.
If you still have cable, consider cutting the cord and opting for one or two subscription streaming services. Our family loves Disney+, there's something for everyone and their original content is epic, but still family-friendly.
It's up to you to determine what is considered a need versus a want. I would argue that the $6 Starbucks run is a want, but my wife would say otherwise (she does have to put up with me, so it's understandable).
Another grey area can be owning vs leasing a car. Do you even need a car? If you live in a major city, you may be able to walk to where you need. If you are in a suburb, owning a car will likely be cheaper in the long run than relying on ride-sharing apps.
Talk to your partner and align the best that you can. Heck, even get your kids involved and teach them something along the way.
A united front is much stronger. If you are one of our solo-parent heroes, I'd consider running your budget by someone you trust. It never hurts to get a second opinion.
Savings & Debt Management (20%)
This is by far my favorite area of the 50/30/20 budget.
The needs and wants sections are more focused on today, while the "savings and debt" section is about you and your family's future.
Whether it's paying down your credit card debt or saving for your emergency fund and increasing retirement contributions, investing is crucial for the long-term health of your family.
Minimum payments for items such as mortgages and credit cards all fall into the 50% needs category above. Everything beyond the minimum falls into the Savings & Debt category.
Not sure where to start? I'd consider working towards a healthy emergency fund, saving at least 6 months of living expenses.
Once your emergency fund is set up, start looking at ways to pay down debt and start investing money so that it will continue to grow.
If your employer offers a 401k match, consider investing enough to at least max out their contribution. That's extra money for retirement.
Investing in yourself (or your partner) is another great way to use this portion of your budget.
Anything that can help advance your family's financial goals is a worthy way to spend your money.
Whether pursuing a side hustle or learning something new, take the leap and make it happen. I worked full-time and took classes at night and on weekends for roughly 3.5 years to earn my MBA.
Did it take me longer than if I went full-time? Sure did, but I didn't want to lose out on income and jeopardize my family's financial well-being. Investing in yourself is always worth it.
Should You Choose the 50/30/20 Budget?
Yes and no…it depends on you.
There's no such thing as the perfect budget, try one and see how it works for you. I love trying a different approach every few years, it helps me break the routine and think differently.
My only suggestion is to give it an honest try for a few months before jumping to something else or giving up. Anything worth doing takes time and effort, including budgeting.
If you're curious to learn more about budgets, check out our Budgeting Guide for Parents, or get started budgeting today with our Budget Planner.
Happy Budgeting!
