Inside: Learn more about the 50/20/30 budget and why it is perfect if you don’t like counting pennies.
For those of you that hate budgets, or at least recording every last penny, the proportional or 50/20/30 budget may work better for you. It is simple and flexible.
The basics of this budget is you allocate a certain percentage of income on needs, another percentage on savings, and the remainder on wants. The most commonly quoted percentage allocation is 50/20/30 for needs/savings/wants.
Priority number one is taking care of your needs. This should take up no more than 50% of your income with this budget allocation. Needs are things that wouldn’t leave you homeless, unemployed or starving. These are things you would have to pay for no matter where you live.
It seems like 50% is a lot, until you think about how many things are needs. In this category include housing, utilities, transportation, and food.
Are you having problems getting this category down to half your income? Make sure you aren’t including wants in this category. Also see if you can lower expenses on some items. Can you cut the grocery bill? Long term, do you need that big of a house/apartment?
The next category and next in line of priorities is savings. Here you would include your emergency fund, retirement accounts, investments, extra debt payments, etc. The goal here is to have at least 20% of your income going towards savings.
Last of all is your personal spending category which should take up no more than 30% of your budget. It can be hard to separate some wants from needs. These are items that are unnecessary, though it may not feel that way at times. Wants includes cell phone, eating out, entertainment, memberships, vacations, and hobbies.
If your cell phone is your only phone and also needed for work, you might consider it a need rather than a want.
Wants is also a prime area to reduce spending. You can look for cheaper cell phone plans, eat out less, try less expensive entertainment, etc.
Overall, the 50/20/30 plan is a solid plan, but depending on where you live, you may need to adjust needs due to extra-high housing costs in the area. This could mean your allocation looks more like 60/20/20 and you should strive to get it closer to 50/20/30.
If you want to amp up your savings to pay down debt or retire earlier, you might like having your budget split 30/60/10.
The beauty of this budgeting method is you can adjust the allocation as you need or want.
Lowering savings percentage means more spending is allowed, but you’ll have less (or nothing) saved for retirement or emergencies. Not a good idea.
An extra-high savings rate means you are willing to live in a smaller house and forego expensive vacations or nights out and in exchange you’ll be able to retire earlier and be better prepared for money emergencies.
Make it Easier
The need and savings categories make it very easy to automate those parts of this budget. Set up auto-pay for your needs. Then set up your paycheck deposit to have some redirected to your employer’s retirement plan and the rest to a savings account where you can then have auto-transfers set up for an emergency fund account.