Photo by Alejandro Escamilla
Build a budget. Doesn’t usually rise to the top of our to-do lists. But no one can deny the importance of regulating our spending and being intentional with our saving. The thing is, building a budget doesn’t have to be a menial task that is destined for failure. The right kind of budget should empower us to achieve our long-term goals without having to give up the things we love today. The 50/20/30 budget is the perfect place to get started. Here’s how it works.
Three simple steps to help you build a budget.
- Necessities: 50% of your monthly after-tax income should be spent on necessary living expenses. These include rent, mortgage, car payment, utilities, groceries, and other bills. These are items you are committed to paying or can’t delay purchasing.
- Financial goals: 20% of your monthly after-tax income should be allocated toward financial goals. These can include paying down debt, saving for retirement, contributing to an emergency fund, or investing.
- Discretionary spending: The remaining 30% of your monthly after-tax income can be spent on the things that make you happy. Think fitness classes, books, spa appointments, Netflix, and date nights. These are discretionary purchases that you could eliminate or delay if things got tight. I like to use Personal Capital, a free budgeting tool, to track my spending by category since this bucket can fluctuate month to month.
It’s important to note that the 50/20/30 budget is a guide, not a rule. Everyone’s budget will look slightly different. For instance, someone who lives in NYC may pay more than 50% in living expenses. Someone with a lot of student loan debt may need to allocate more than 20% toward financial goals. Either way, the 50/20/30 budget template is an easy and flexible way to grow your net worth and still embrace the lifestyle you want today.
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