Think budgets are only for low-income earners? If so, think again. According to CNBC, 33% of Americans run out of money before payday — even those with incomes over $100,000/year. The largest expenses for households of every income level are healthcare, housing, education, utilities, and food.
So, everyone needs a budget. And, having an effective one can be an invaluable step toward easing financial stress. By the same token, a lack of planning can leave you unprepared for the unexpected. Below, we explain how the 50/30/20 budget works and how it can make a difference in your life.
What Is The 50/30/20 Budget?
The 50/30/20 budget is a simple financial strategy popularized by Elizabeth Warren in a book she co-wrote with her daughter Amelia Warren Tyagi. The book is called All Your Worth: The Ultimate Lifetime Money Plan. So, who's Elizabeth Warren? She's a Massachusetts senator, former 2020 presidential candidate, and Harvard bankruptcy expert. Her strategy breaks your net monthly income into three categories: needs, wants, and debts/savings.
Needs – 50%
This budget suggests allocating no more than half of your net monthly income to your needs. For this budget, "needs" are defined as things that ensure survival. This includes rent/ mortgage payments, utilities, groceries, healthcare, and clothing. If you have your eye on a designer dress for an upcoming party, that doesn't count as a "need." Also, take-out meals and cable service aren't actual needs, either. Paying the minimum amount on credit cards or other debt does count as a need, however.
At first sight, the rules seem complicated. However, it helps to think of it like this: If you can stop paying for something without experiencing physical pain, then it's a want rather than a need. Take, for example, weekly restaurant meals. If you cut that out, try making your own gourmet meals at home. Here's how to do it: head over to Youtube or Food Network to see how talented chefs make delicious meals using inexpensive store-bought ingredients.
Wants – 30%
"Wants" are things that you can live without but that make life more comfortable. This includes upgrades to necessities. For example, you need a cell phone for emergencies and employment purposes, but you want the unlimited data plan. The same one your neighbor has. By the same token, a pricey vacation, $1,000 designer shoes, and jewelry definitely count as extravagant "wants."
Basically, the rule for this category is: if it isn't essential for survival, it belongs here. Keep in mind, however, that things like car repairs aren't considered a "want." If you fail to pay for them, it could lead to losing your job and by extension, the necessities that keep you alive. We're talking about food, clothing, and healthcare. So, whatever you do, don't ignore those squealing brakes!
Debt & Savings – 20%
This section is all about increasing your financial security. You'll want to make minimum debt payments to keep your credit score healthy. So, mandatory minimum payments are considered a necessity in this category. You can also include any amount you pay above the required minimum. That goes for any kind of debt – healthcare, education, and car/ mortgage payments.
The rest of the 20% should be put away in your savings account. This money can be used as an emergency fund. You can also use the money to fund your retirement accounts or purchase mutual funds and stocks. Any form of savings and investment should be part of this category.
What if I'm Self-Employed?
If you're a freelancer, independent contractor, or business owner, there's an extra step for you. Many people who fall into this category don't get a reliable or fixed paycheck every week.
Before you create a 50/30/20 plan, you'll have to figure out your after-tax income. To get this number, subtract your self-employment taxes, income taxes, and business expenses from your gross income. Once you get that number, you can begin crafting out your 50/30/20 plan.
Live Better and Worry Less With a 50/30/20 Budget
The great thing about this budget is that you can alter the percentages to suit your needs. So, if your take-home pay is $2,500 a month, you can only allocate about $1,250 a month to the "needs" category. Remember that this category includes things like food, utilities, car expenses, minimum payments on credit cards, healthcare expenses, and rent/mortgage payments.
But, what if you come up short? The beauty of this budget is that it gives you insight into your spending habits. With that knowledge, you can tweak the percentages to suit your circumstances. On the other hand, you may decide that you need to move to a less expensive neighborhood or that you should stop using credit cards altogether.
The 50/30/20 budget is a flexible tool to reach your financial goals. Don't worry about using the exact percentages given. What's important is that you have an effective budget to work with.
Finally, during these financially uncertain pandemic times, I want to leave a link to some excellent financial strategies for the self-employed, written by Rebecca Lake and Caitlin Mims. I encourage people to check more of their website for other credit related tools and resources. Good job on the article and guide guys!