When you are creating a budget, it can feel very complicated to figure out where your money should be going. You have so many expenses, needs, wants, and you need to think about saving some money as well.
How do you balance all of this without becoming frustrated?
Budgeting plays an important role in all aspects of life yet only 41% of Americans actually follow a budget. A good budget considers life insurance, retirement planning, college planning, housing expenses, and health insurance as well as all of the other important expenses in your life.
In this article, we will introduce you to the 50-30-20 budget and how you can use it to organize your monthly budget. Each section represents a percentage of your total monthly budget and gives you a clear outline that much easier to understand than other, more complicated budgeting methods.
The 50: Your Expenses
The largest portion of your budget is your regular monthly expenses. These are expenses that you simply cannot ignore. In this section, you will include items like debt payments for your home or vehicles. Other essential expenses should also go in your “50” section. For example, health insurance and life insurance premiums are another important expense.
Finally, you will round out the first portion of the 50-30-20 budget with needs like groceries, utility bill payments, and transportation costs for getting to work or school.
Once you have completed the portion of your budget, you may notice the expenses are more than 50% of your total monthly budget. This could indicate that you are living beyond your means. While you could pull money from other areas of your budget, this type of lifestyle is unsustainable and will result in less money for retirement planning. It may also indicate your debt servicing ratio is too high which could make getting loans difficult in the future.
The 30: Your Wants
If you found you are spending more than 50% of your budget on your needs then this is the section you will have to reduce in order to make up for the difference. As the name suggests, these are non-essential expenses. This is where you would budget for going out to eat, entertainment expenses, shopping for new clothes, and other monthly expenses that are seen as more of a luxury than something like health insurance, for example.
Some people who are aggressively trying to pay down debt or save for their future may reduce their wants part of the budget from 30% to a smaller number and allocate extra money to other sections. This budget is simply meant to be a guideline from which you can work but it does not have to be set in stone.
The 20: Saving and Retirement Planning
Finally, the last 20% of your budget should be dedicated to saving for your future and the future of your family. Unlike your “wants,” the saving portion of your budget should not be decreased to make up for shortfalls in other areas of your budget. This money is meant to create a secure financial future for you in retirement.
College planning for your children may also be included in this section of the budget. Determining how much to allocate to retirement planning and college planning will depend largely on your personal situation, the size of your family, and how much you wish to help your children with college expenses.
Putting the 50-30-20 Budget into Action
Building a budget and putting it into action can be much easier said than done. Finding the money to cover important expenses like life insurance or health insurance while staying true to your budget can be a challenge for some.
At Mooney Lyons, we work with families to provide personalized, expert advice that allows them to meet their needs, follow through on retirement planning, and still have some left over for fun. Contact us today!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.