Budgeting 101 - Classic 50/30/20

🗓️ Today’s Foresight - Budgeting and Planning for Tomorrow: 50/30/20 Traditional Method of Budgeting

The 50/30/20 method is a classic in personal finance. It’s simple to follow and categorize and it is also easy to calculate.

Today we will walk through what the numbers mean, how to use it, and some of the pros and cons of this method. It may or may not be right for you in your specific life stage!

Throughout this series, we’ll say this over and over, but while you need to budget, the method matters because it has to work for you.

If you don’t stick to it, what’s the point?

🚀 Building the Future by Looking to the Past - 50/30/20

So many numbers!

The numbers themselves are fairly straightforward:

• 50% of the budget goes towards NEEDS

• 30% of the budget goes towards WANTS:

• 20% of the budget needs to go to PAYING OFF DEBT, SAVING, and INVESTING

How to use the 50/30/20 Budgeting Method

The budget built under this method generally uses your take home pay - how much money actually hits your bank account when you get paid? This is your net income. Gross income would be income before taxes. This is true for many methods of budgeting, but it is really important here since we have a formula to build our budget!

For example, let’s assume you take home $4,000 a month and that’s what actually comes into your account. That’s roughly the median take-home pay for full-time workers in the US according the Bureau of Labor Statistics (BLS).

50 - Fifty percent of that take-home pay amount would be $2,000. This is for needs. Housing, mortgage, medical stuff, pets, food, groceries, toilet paper, car payment, and so on. Needs also include minimum debt payments - think the credit card, mortgage, student loans, car payment, etc. Extra payments go in the last twenty percent we’ll get to in a minute. These are things you must do to survive and thrive being you.

30 - Thirty percent of that take-home pay would be $1,200. This is for wants. Wants is a little broad, but literally it’s just anything that is not a need on the “needs vs. wants” spectrum of things. It includes non-essential spending such as eating out, concerts, movies, and other hobbies. But can also include things such as clothing. It doesn’t have to be such large purchases either and you can drill down as far as you want.

For example, we like to buy some food things at the grocery store that we absolutely considering “luxury”. From chips we don’t need or to high end fish - these are things beyond the essential groceries we need and use day in day out.

20 - Twenty percent of a $4,000 take home paycheck per month would be $800. We would argue this is also essential, but includes adding to your savings account, investing in something like an Individual Retirement Account (IRA), and paying down debt such as credit card debt. Ideally, we’d build an emergency fund first.

Pros of the 50/30/20 Budgeting Method

Simplicity is the biggest pro of the 50/30/20 method. You know what hits your bank account and you divide it into three spending buckets. As long as you keep each category to their correct percentages, you are golden.

Starting point with flexibility for most people new to sitting down and budgeting. These aren’t necessarily absolute have to numbers. If you live somewhere with an extraordinarily high cost of living, you may need to up your percentage for needs. If you’re looking to aggressively invest for retirement or trying to dig your way out of debt, you may increase your percentage going to investing and paying off debt.

Cons of the 50/30/20 Budgeting Method

Thirty percent could be a lot of money to consider as “wants”. Perhaps the method is too broad? Also, a want could vary from person to person. If you have a family, it’s very likely the needs category is going to be higher especially with young kids.

It can also be difficult to determine what is a real need versus a want. I mentioned clothes before - some of these are needs, but absolutely some things are wants. But how much of each is appropriate?

For someone just starting out in their career, it may understate how much someone should really try to stash away to build an emergency fund or start their retirement nest egg.

Overall, the 50/30/20 method is a great way to get started on your budgeting and financial journey.

For any budget, we need to categorize our spending and if you look at what you are actually spending, is it already close to 50% needs, 30% wants, and 20% savings and investing? Are we spending too much on wants? Are we saving enough? That’s really the goal here is to compare our spending to something and set some sort of plan.

😋 Frugal Food - Unit Cost

Every issue we’ll have a recipe or general food tips to save money and stay healthy

Sometimes, things are cheaper at other stores. But sometimes you are actually getting less. This is where unit costs come in so we can compare, well, apples to apples.

Some stores have this and others you may need to break out a calculator - price things per ounce if they are not easy to count. A 16 oz things is probably cheaper than a 30 ounce thing, but sometimes the bulk buy is cheaper per ounce. We need to think about how long some things last and how fast we may actually go through them because we do not really want to over buy something and waste half of it either.

Things we can count are easier - how much does each thing cost? Eggs are a dozen, but can also come in packs of 18. Or cookies (YUM!) come in different package sizes. So take the price and divide by how many are in the package.

You’d be surprised when comparing brands how different the sticker total price is versus the unit costs.

❓Q&A - Send us your questions!

See you in the future,

Foresights Foundry

We talk about family, finances, money, budgeting, personal growth, planning, and making data driven decisions through this newsletter and (work in progress) on YouTube.

Disclaimer: The information provided on this page is for informational purposes only and is not intended to be financial, legal, investment, or tax advice. You should consult with a relevant professional.