When you’re just starting to budget, using percentages can be a helpful way to see if your spending is comparable to everyone else. In this post, I’ll focus on what a 50-30-20 budget is, how you can create one, what the benefits of using the percentage budget method can be, and when it isn’t the best budget method for you to use.
What Is A Percentage Budget?
The percentage budget is a specific method where you allocate a percentage of your income to broad spending categories. This budgeting approach helps ensure that you manage your finances in an organized and balanced way.
By dividing your income into categories based on predetermined percentages, you can cover all your necessary expenses while saving money, and reaching your financial goals.
A percentage budget has three characteristics.
- Each spending category is assigned a fixed percentage of your total income.
- The percentages can be adjusted based on your financial goals, making this style of budgeting flexible.
- This budget style provides a simple-to-follow framework for managing your money.
How To Create Your 50-30-20 Budget
Determine Your Net Income
Your net income is the amount of money that is deposited into your account after all taxes and deductions are accounted for. This can also include automatic deductions such as company vehicle expenses, health care premiums, as well as retirement contributions.
Assign 50% to your needs
Expenses that fall under the category of “needs” are expenses that are essential for your survival, and allow you to maintain a basic standard of living.
Examples of what would fall within the needs category include:
- Housing Costs: rent, mortgage, property taxes, homeowners or renters insurance
- Utilities: Electricity, water, gas, trash, internet, heating
- Transportation: car payment, fuel, car maintenance, insurance, public transportation costs
- Groceries: food, and household supplies
- Insurance: any health, dental, and vision premiums that are not automatically deducted
- Healthcare: any out-of-pocket medical expenses, such as copays and prescription costs
- Minimum Payments to Debts: minimum payments on your credit cards, student or personal loans, and other debt accounts
Allocate 30% to your wants
Expenses that are considered “wants” are discretionary expenses that help to enhance your lifestyle, but they are not necessary for your basic living standard.
Examples of expenses that would fall within the wants category include:
- Eating Out: restaurants, cafes, and take-out
- Entertainment: concerts, movies, streaming services, sporting events
- Hobbies / Leisure Activities: sports, recreational activities, books, video games
- Subscriptions / Memberships: magazines, music streaming services, gym memberships
- Shopping: clothing, electronics, accessories, and other miscellaneous items
- Travel / Vacations: flights, hotels, and activities while traveling
Allot 20% to your savings and debt repayments
This portion of a percentage budget is all about improving your financial health. It also helps you to use your income to plan for the future with less stress and more ease.
Examples of categories include:
- Emergency Fund: building an emergency fund that can cover 3-6 months of your living expenses will help protect against any unexpected financial setbacks that occur
- Retirement Savings: any contributions to an IRA or a 401(k). If your employer offers a contribution match, try to contribute enough that you can get the full amount
- Investments: stocks, bonds, mutual funds, or any other assets that will grow wealth over time
- Extra Debt Payments: pay down your high-interest debt faster my making additional payments above the minimum amounts
- Large Purchase Savings: create sinking funds that can cover future major expenses without using your emergency fund
Track Your Spending & Adjust As Necessary
No matter which budgeting method you use, to make sure that your spending is within the parameters of your budget, it is crucial that you track your expenses.
I like to use a paper budget planner – I sell my budget workbook on Etsy, but there are apps and spreadsheets out there that you can also use as well.
What Are The Benefits Of Using A 50-30-20 Budget?
Simple & Easy To Use
By using the percentage budget method, you divide your income into three overarching and simple categories. This makes your budget very simple and easy to follow. With the three main categories, your budget isn’t very detailed and complex, which helps your budget to be less overwhelming.
Flexibile & Customizable
When your budget is based on percentages, it will work regardless of your income level, which makes it a very diverse approach.
However, if you are low-income, or have a variable income, you can read more about methods that would better suit your financial needs in the next section.
Encourages Mindful Spending
With the simplicity of three broad budgeting categories, you have more awareness of your spending patterns. This, in turn, creates a mindset of being mindful of your financial decisions.
When you have a cap of 30% of your income, it helps prevent you from overspending on non-essentials, as well as keeps your finances in check.
You can read more about how to effectively track your expenses here.
Incentivizes Setting Financial Goals & Financial Discipline
Consistency in your financial habits is what builds momentum for you to achieve your financial goals. Those financial habits are also crucial for improving your overall financial health.
When you know that you are setting aside a set amount of money per paycheck towards your financial goals, you can reach them easier. This includes building your emergency fund, contributing to retirement accounts, as well as any other investment opportunities you choose to take.
Reduces Stress
By knowing that your essentials, wants and savings are all prioritized within your budget, you have a sense of control over it. When you feel that you are in control of your finances, it helps reduce your financial stress.
Your financial stress is also reduced since you have a predictable plan for your income in place. This makes it much easier to plan for your future income, as well as helps you to avoid any financial surprises.
What are some variations of 50-30-20 budgeting?
Below are some common percentage budget variations, and what the breakdowns look like, that you could use instead of the 50-30-20 method.
- 70-20-10: 70% living expenses, 20% savings & investments, 10% debt repayment
- 60-20-20: 60% towards fixed expenses, 20% to financial goals, 20% for wants/flexible spending
- 80-20: 80% towards all expenses, 20% towards savings, investing, and debt payment
When Shouldn’t You Use The Percentage Budget Method?
You are prioritizing debt payments:
If you have a significant portion of your income going out to debt payments, 50% needs and 20% towards savings and debt may not be enough for just the minimum payments. This means you may need a more aggressive budgeting method that prioritizes your debt repayment plan.
You have a low or a variable income:
A low income has the potential for your essential living expenses to be more than 50% of your income. In this case, a 70-20-10 percentage budget method may work, but if you also have debt, you will need a more flexible budget method that won’t have you compromising your needs.
With a variable income, you may find it difficult to stick to any percentage budget. In this case, the paycheck budgeting method, also known as zero-based budgeting, might work better.
You live in a high cost of living:
Whether you live in a high-cost-of-living area, or your income isn’t keeping up with the rising cost of goods and services, the percentage budgeting method leaves your housing and transportation costs at 50-70% of your income. I find the paycheck budgeting method works best for this scenario. It’s flexible enough that you can determine what your priorities are, and how you allocate your money.
You are working towards specific financial goals:
When you have specific financial goals, such as aggressively saving money for a down payment on a house, or putting as much money as possible into a retirement account, you will want to put more than 20% of your income towards savings. No matter the savings goal, you will want to look at a different budgeting method, such as paying yourself first, that helps you reach that goal.
Have you used a percentage budget in the past, or are you currently using this budget style? What’s something you enjoyed about it?
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