Many things today promise to be “guilt-free”, but here’s one that lives up to that promise: a budget. In fact, a good budget may be the only surefire way that you can spend some guilt-free money on the fun things in life while also setting something aside for your financial future. If you need to whip your financial house into order, one solution is to get on the 50/20/30 budget.
The 50/20/30 system works by budgeting a percentage of your monthly income toward three categories of expenses: living essentials, savings and personal spending. The idea is not to spend more than the given percentage on each category every month. Here is how the budget is broken down:
50 percent goes to living essentials. This category includes your rent or mortgage payments, utility bills and necessities like groceries and transportation to work.
20 percent goes to financial goals. This money should be directed to your savings, investments and debt payments. If you’re debt payments take up the whole 20 percent, or if you’re behind on your retirement savings and need to set aside more, you should strongly consider increasing this percentage if possible.
30 percent goes to personal spending. This spending group is for things you want but don’t truly need: shopping, entertainment, vacations, etc. Having this category allows you a guilt-free amount to spend on yourself without derailing your financial goals.
The 50/20/30 budget has several strengths. With just three categories, it offers a level of ease and flexibility while still requiring you to maintain discipline and focus toward your goals. It’s also designed to work across income levels and for homeowners and renters alike. The dedicated savings category helps ensure you build wealth instead of merely treading water.
To put the budget to work for yourself, start by determining your household’s monthly take-home pay, and use that as your starting 50/20/30 split. Go with your average monthly income instead if your pay fluctuates from month to month. Keep track of your expenses using your credit, debit and check records or by using a tool such as a spreadsheet, Mint.com or YouNeedABudget.com. Check to see how well you’re meeting your goal each month and if your spending needs to be corrected. If the 50/20/30 split simply can’t work in your situation, you can adjust the proportions as necessary.
Sticking to a budget can be tough, especially if you’ve developed bad spending habits. However, the sooner you start, the sooner you can enjoy the peace of mind of building toward your financial future.
Draper and Kramer Mortgage Corp. does not provide tax or financial planning advice. For specific advice for your situation, contact a tax or financial planning expert.