A budget should be a plan to spend every dollar. It must include all your needs and some of your wants, as well as — and this is important — saving for emergencies and the future.
If you’re not sure where to begin, we suggest the 50/30/20 system.
What is the 50/30/20 Budget System?
This popular budget allows you to maximize your money. It requires you to spend approximately 50% of your post-tax income on necessities. You should not spend more than 30% for wants and save at least 20%.
This plan is very simple. In the long run, someone following these guidelines can expect to have manageable debts, enough savings to cover irregular or unexpected expenses, and a comfortable retirement.
Use the 50/30/20 Budget System
- You can spend up to 50% of the income you earn on your needs
- Don’t spend more than 30% of your earnings on wants
- Commit 20% of income to saving and debt repayment
You can spend up to half of your income on needs
You should spend about half of your income after tax on the following:
- Basic utility bills, such as electricity bills
- Minimum loan repayments. Any amount above the minimum is considered debt repayment and savings.
- You may need to pay for child care or other expenses so that you can continue working.
You may have to dip into your “wants” budget if your essentials exceed the 50% mark. You’ll need to adjust your budget. It’s nothing major, but it’s a good idea.
It’s smart to revisit these fixed costs periodically, even if they fall within the 50% limit. You might find a better mobile phone plan, a chance to refinance your mortgage or cheapest car insurance. This gives you more money to spend elsewhere.
>> MUCH MORE: How to Save Money with a Tight Budget
Spend 30% of your income on wants
It can be hard to separate wants from needs. Needs are necessary for working and living. Wants include entertainment, dining out, gifts and travel.
It’s never easy to make a decision. Restorative spa trips are they a desire or a necessity? What about organic food? Individuals make different decisions.
You may decide that your wants will have to wait until your debts or savings are under control. Your budget should not be so strict that you are unable to buy things for fun.
Budgets need both flexibility — perhaps you forgot an expense, or it was larger than expected — and money that you can spend however you like.
Budgets are tools to help, not to restrict you. You’re less likely to stick to your budget if you don’t have money for fun. A good budget will help you stick to it.
Spend 20% of your earnings on debt repayment and savings
Save 20% of your income after taxes to pay down debt and plan for the future. Be sure to consider the big picture. This may require you to combine debt repayment with savings in order for your goals.