Could you get back on track with your finances using the 50/30/20 budget?
Anyone who knows me understands that I'm not particularly fond of the word “budget.” While there might not be much of a difference between what I call my “spending plan” and a budget of sorts, it makes me feel better about how I spend my money.
But, even though I'm not big into budgeting, I know that it's a necessity for many households. When you are in the process of figuring out how to pay down your debt, a budget can help. And many households feel better when they have a budget (a zero-based budget is becoming increasingly popular). I'm often asked for budget ideas.
One strategy I ran across recently, and thought might be of interest, is the 50/30/20 budget.
What is the 50/30/20 Budget?
The 50/30/20 budget comes from Elizabeth Warren. The idea is to base your budget on your after-tax income (which is important if you want to be a little more accurate in your calculations). Next, you apportion your spending accordingly:
- 50% of your income is for your needs. Make sure you understand the difference between needs and wants.
- 30% of your income is for wants. I like that this budget plan allows for a little fun in your life, including your wants. However, you need to be clear about the difference. Your TV bill and the eating out are wants.
- 20% of your income goes toward savings and repaying debt.
Really, this plan is a spin on the classic “live off 80% of your income” budgeting strategy. But it breaks out your needs versus wants, and encourages you to really think about where you are spending your money.
And, of course, this is just a guideline. If you could put more toward paying down debt by putting 40% toward debt repayment and spending only 10% of your monthly income on wants, you could get out of debt that much faster.
When you have a great deal of debt, it makes sense to tweak this rule somewhat to put more money toward debt repayment, since paying off high-interest debt is an investment in yourself and in your future. As long as you have high-interest holding you back, you aren't using your financial resources to best effect.
If you are interested, I think the 50/30/20 budget offers some potential as a starting point, and then you can tweak the allocations to fit your own financial goals.
What do you think of the 50/30/20 budget? Do you have a budgeting strategy that you prefer to use? What works best for you?