Making – and sticking to – a budget is important for anyone. If you haven’t started budgeting yet, there’s a simple way to start: the 50/30/20 budgeting system.
First, determine your after-tax income (for couples budgeting together, add both incomes together). Then, simply divide your expenses into needs, wants, and savings/debt reduction in a 50/ 30/20 division. We’ll walk you through the process, and how to determine what types of expenses go into which category.
50% – Needs
To begin, gather a list of all your monthly bills, including housing payments, health insurance, utilities, and the like. Determine which of these expenses are vital to you and your family’s survival – things that would cause undue hardship if you didn’t pay them. Good examples of “needs” include:
- House payment, rent or mortgage
- Health insurance and doctor visits, including regular medication that you or a family member take
- Utilities, including water, power, gas, and sewer access
- Homeowners or renters insurance
- Car payments and car insurance
- Warm clothing and comfortable shoes (but not if you have a full closet)
- Minimum monthly credit card payments – this is a “need” because, without paying the minimum, your credit score can take a hit
Make sure you’re listing things you really need. Your cell phone plan might go here, but the latest phone wouldn’t. For people who are trying to pay off debt or get a better handle on their finances, cutting down to one family car may be an option, or moving the second vehicle to the “want” category.
30% – Wants
Wants don’t just include clothes and vacations. They’re also the perks of daily life, including cable TV or an unlimited data plan for your cell phone. When you’re deciding if something is a want or a need, ask yourself if this is something you can get along without, or if doing without it will cause a little inconvenience or discomfort to your family but not actual hardship.
Examples of “wants” include:
- Cable service and enhanced streaming media subscriptions (Netflix, Hulu, etc)
- Latest cell phone
- New clothes or shoes, especially “just because”
- Dining out and vacations
- Your morning coffee-shop latte
20% Savings and Debt Reduction
Finally, contribute 20% of your post-tax income towards paying off debt and creating a rainy-day savings account. As you gradually pay off debts, you can begin to contribute to a retirement savings account or college funds for children.
If you’re paying more than the minimum monthly credit payment to bring your balance down, the difference between the minimum amount and the payment you make falls in this category. For example, if the minimum is $25 and you’re paying $50 per month, then the additional $25 above the minimum payment goes here.
If you find that you don’t have an extra 20% of your post-tax income to devote towards savings, start where you can or take another look at your needs and your wants. There could be “wants’ that you can eliminate, or ways that you can reduce your household overhead (the “needs”) in order to free up more money for savings.
Understanding which expenses are needs and which are wants can help you make better decisions about how to spend your money. The 50/30/20 budget model is easy for people who have never budgeted before to get started and allows you to have a more careful analysis of what you actually need, versus why you want. This plus a dedicated percentage devoted to saving or paying down debt can help you feel more in control of both saving and spending.
Read next: Envelope Budgeting
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