Budgeting is a great way to make sure your expenses stay under your income. But, despite its benefits, only a third of Americans consistently maintain a household budget.1 There are likely many reasons for this, including a lack of financial education in our schools, leading to poor spending and saving habits in adulthood. In fact, about half of American and Canadian households live paycheck to paycheck.2 About 20 percent of people have no emergency fund, and nearly 50 percent are “concerned, anxious or fearful about their current financial well-being.”2
While the concept of documenting every single expense over the course of a month and creating a comprehensive family budget may sound overwhelming (and unachievable) at first, there is a simple solution that could help — it’s called the 50/30/20 budget rule. A fairly simple formula, this rule provides some structure to your spending and saving without all the details, making it easier to get a clear picture of how much money is going out each month, as well as where it is going.
The 50/30/20 Rule: How It Works
The 50/30/20 budget rule is becoming more popular because it’s easy.
Here's how it works:
- 50: Half of your income (50 percent) goes to essential living expenses, like your mortgage, the power bill, and groceries.
- 30: Thirty percent of your income goes towards things you want, but don’t necessarily need (eating out, HBO Max, those cute shoes you'll only wear once).
- 20: Twenty percent of your income goes to paying off debts, savings, and investments.
One important note: the essential and flexible spending percentages are the maximum — you can always try to go below the recommended percentage. Obviously, the transactions in your “want” category should be scrutinized the most, while essentials and savings should take precedence. However, there has to be at least some balance between enjoying your life now and saving for the future.
Implementing the 50/30/20 Budget Rule
Now that you know what the 50/30/20 budget rule is, it’s time to execute it. To start, look at your pay stubs or checking account to determine exactly how much money comes in every month. This amount will be the foundation for your budget. If you’re self-employed or have irregular income, you can either use an average over the last 12 months or your lowest income month if you want to be more conservative.
Once you know how much money you bring home each month, it’s time to track all of the bills, items and experiences you pay for every month. From your morning Starbucks coffee to your water bill, track everything you’re spending money on. You can either save all of your receipts, look at your bank and credit card statements, or use a tracking program like Mint.com or YNAB. Once you have all the transactions, drop each one into the corresponding 50, 30, or 20 bucket. Now you're done!
This process will help you get clear about your actual spending so you can decide what adjustments need to be made month to month. While it might seem like a hassle at first, eventually, as you adjust your spending and saving habits, you’ll realize how helpful the rule is for not only your peace of mind, but also your future.
This content is developed from sources believed to be providing accurate information. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for informational purposes only.