My favorite beginner budget is the 50/30/20. I first read about it in the 2006 book All Your Worth by Elizabeth Warren (yes, THAT Elizabeth Warren!) and found it so simple and reasonable it became my go to for years. How much should I be paying down towards debt? What car payment can I afford? Is it okay to buy myself a new dress for this wedding coming up?
The idea is that you break your budget into three categories:
50% for needs
"Needs" are anything you must pay every month to sustain your life and meet your legal obligations. Rent, car payments, minimum credit card payments, minimum food. For the food budget, Americans can look up the USDA recommended food budgets. The government monitors food prices and allocates funds for employees. For example, in July 2023 a family of 4 should budget $965 for a "thrifty" food budget, $1500 for "liberal". My family uses the $1200 "moderate" budget. Anything past that, you're into the "wants" category, buying food that you like but don't necessarily need.
If you're in debt, a great first step is to have a "needs only" month. Do not shop. Do not go out. See if you really can live on 50% of your income. If your bills exceed that, you may have signed up for too much.
30% for wants
"Wants" are the extras that come up. If you were suddenly without any income, you'd be able to cut these out. I like this 30% because it doesn't micromanage any part of your budget. I automatically hate any sample budget with a line for "new clothes" because let's face it, I do NOT need new clothes every month. Who does? Vacations, dining out, wedding presents, kids music lessons, all go into this category. I will admit that on my budget I split this into 20% wants, 10% charities. Charities are very important to me and I donate a lot. I have one credit card just for charities to auto-bill. I know I could cut that out if I had to. But I decided long ago that as long as I'm getting a paycheck, some of it should help out the people who don't.
20% for savings and debt repayment
Finally, this leaves 20% for savings and debt repayment. 10% in a 401K is fairly standard and puts you on track to retire about 50 years after you start working... I'll do another post about that math. 20% gets you under 40 years. These numbers exclude things like pensions and social security, but most of us who budget carefully don't plan to heavily on things like that anyway.
I also like the suggestion to divide this up into 15% retirement savings, 5% emergency savings. I like this guideline because you can set up direct deposit to send that 5% into a savings account you've got off to the side that you try not to touch. I do not agree with advice about setting an emergency savings "goal", like 6 or 12 months expenses, before you do any retirement savings or anything else. That's not realistic. It can add up to tens of thousands, and take you years to save up. If you're putting away 5%, you can use it for other great things if the emergency account gets to be enough. Call it your "next car" fund, start saving for your kids college. But you're always saving 20% total.
How to make it happen
There are a few ways to see if you're on track for this budget. I try not to be too picky about it, but here are the basics of how I check myself:
- We pull our pay stubs and take the net income (aka after tax) plus the deductions like 401K, healthcare premiums, anything we SIGNED UP for, and call that "income"
- Calculate out 50/30/20%
- Pull our last few bank and credit card statements to see where the money is actually going
- See if we're on track
That step 3 is a big deal to me, too many people make the mistake of starting from scratch on their budget without looking at where they're at now. In today's world, a lot of people never even look at statements! They just see the "total credit card balance" at the end of the month, check their bank balance to see if they can pay it, and never wonder how they got there. But how can you get anywhere if you don't know where you've been? See where you're at and adjust from there. Everyone has a budget... buckets where your money goes. Yours just might be free wheeling with no checks in place, and that's why you're here. It will get better.
Comments
Post a Comment