Admit it, setting up a personal budget and sticking to it just isn’t your thing.
Why waste time tracking what you spend daily, weekly, monthly against how much you earn from your job, savings, and investments? Most Americans feel the same way, with over half surveyed claiming to be budget averse and unaware of how much they spend.
Why budgeting makes financial sense
But that’s precisely the point of a budget, right? A basic, money-management tool helps you identify wasteful spending while you make smarter choices about where and how much to allocate your well-earned income for the biggest return.
Not having a handle on your household expenses sets you up to squander hundreds or thousands of dollars in potential savings, money you could put to better use, paying off debts or building personal wealth.
It’s time for you to think about implementing a 50-30-20 budget.
What is a 50-30-20 budget?
One of several budget variations in use is the 50-30-20 budget, which was promoted by Massachusetts U.S. Sen. Elizabeth Warren in her book and supported by other consumer advocates. It offers a simple but effective introduction to personal budgeting and its merits.
- 50 percent -- earmarked for your fixed expenses, like mortgage/rent payments; utility bills (electric, water, natural gas, telephone); food; gas; mass transportation costs; car and student-loan payments, among others.
- 30 percent – this discretionary part of the budget covers your personal “wants,” such as dining out with friends, shopping for clothing, a new TV, or taking a vacation.
- 20 percent – tagged for short-term savings, like high-yield savings accounts or certificates of deposit; and for long-term investments, such as Investment Retirement Accounts, 401(K) and other retirement savings; and stocks and bonds.
Why a 50-30-20 Budget Makes Financial Sense?
Simplicity is the main feature of this type of budget. No fancy buzzwords to remember or need to create and track detailed financial spreadsheets. But it also offers other fiscal advantages:
- You have a better handle on your spending, providing you opportunities to see where you can trim outlays to save money. Eliminating that daily purchase of a cup of designer coffee will free up money you can put toward important financial goals, like paying off credit cards or saving for a house.
- It prods you to look for ways to curb your fixed costs. With budget in hand, you may consider refinancing your car or home, or shop for cheaper auto insurance.
- No need to monitor every single purchase. Most who have tried but given up on budgeting cite the tedium of tracking every penny spent.
Managing your 50-30-20 budget
- The first step is totaling all your sources of monthly income: Primary and secondary job income; retirement income; earnings from rental properties or other investments, like stock dividends and annuity payments.
- Next, inventory your monthly fixed expenses – household bills and other financial obligations that cannot go unpaid such as rent; payments on auto, mortgage, credit card, and personal loans; utilities; groceries; auto, home/renters’ or life insurance premiums.
Say, for example, your monthly income from all sources is $3,500. With a 50-30-20 budget, you would set aside half, or $1,750, to cover your fixed outlays. Thirty percent, or $1,050, would be devoted to discretionary spending. The $700 balance would go to savings or investments.
Getting started with a 50-30-20 budget
With your income tally and expense inventory complete, it’s time to put your new budget in motion. Here’s where your trusted bank or credit union, like KEMBA Financial Credit Union in Ohio can be a useful partner in setting it up.
You likely have a checking or savings account, or both. But do you have direct deposit? If not, consider depositing your paycheck into one or both accounts from which you can draw down to pay bills or allocate funds to investments, according to your new budget. Direct deposit also eliminates the temptation to spend some or all your paycheck as soon as you collect it.
Criticism of a 50-30-20 budget
The simplicity of this budget type is what also drives criticism of it as too. Some think it is too facile in its allocation of financial resources. For instance, some advocates contend 20 percent is too meager for building a meaningful savings or investment portfolio, while others point to a 30 percent allocation for discretionary spending as too high. While this may be true, for most people, it’s a great place to start if you’re new to budgeting overall and trying to do your best.
Flexibility Makes a Workable Budget
Remember, a budget reflects YOUR personal financial portrait. It’s only useful if you make it so. But flexibility in your budgeting also is key.
Your monthly 50-30-20 allocation should be able to readjust to 60-20-20 or 70-20-10 for a sustained period if your fixed expenses unexpectedly jump as they did for many Americans during the onset of Covid-19 and the price inflation that followed.
Unbudgeted windfalls offer benefits
Conversely, any pay raises and bonuses, or unbudgeted financial windfalls, you collect serve as an opportunity to allocate more of your income into your budget. Do the same with savings you incur as you pay down or pay off credit card or auto-loan debt.
Whichever allocation formula works for you or your family, setting up a budget of any kind is the smartest route to more effectively building and managing your wealth.
Contact KEMBA Financial Credit Union and let us assist you with budgeting and other financial tools and products to grow your wealth.