Are you looking for an easy way to plan your monthly budget? If so, then you should consider using the 50/30/20 budget plan. Face it, nobody wants to spend all day staring at spreadsheets.
I first discovered this budgeting method back in 2010 after our first was born and the economy wasn’t very good. So, I checked out a book from the library called “All Your Worth” by Elizabeth Warren. At that time, I had no idea she was a Senator or anything about her.
But the one thing I did know was that this book resonated with me. Big time.
Split everything into three categories
The first thing you need to do is to sit down with a hot cup of coffee and go over last month’s spending. For me, the only way to do this is to go ahead and bring up my bank account on my phone or laptop. Then look back at the previous month or two and just use that as your guide.
If you usually do a good job of tracking your spending then this step might be easier for you. And, on the flip side, if you have expenses spread out over several credit cards, your checking account, and cash then this step might take longer.
But the idea here is to review everything you spend in a typical month. Then you want to split each expense into one of three categories:
- What you need
- What you want
- Save for the future
It can be tricky to know what expenses go in which category. And for some people, there isn’t one cut-and-dry answer. For example, before 2020 when I wasn’t working at home and the kids were in school our cable and internet bill would have been in the “want” category.
However, for a short period of time, it was definitely in the “need” category. And now that my job has transferred me home permanently, I still leave it there.
Technically, the cable part of the bill most certainly isn’t a need and this could be up for debate if we ever needed to drastically trim the budget. For now, I don’t want to think about how to split that bill and put each half into the correct category so I just leave it under “need.” For you, you’ll need to evaluate each bill and see where it lands for your specific situation.
What you need
Let’s look at each of the three categories starting with the expenses you need each month. At the basic level, this is food, water, and shelter. However, for the majority of us, the need category reaches further past these very basics. I would venture that for most of us, our needs encompass:
- Shelter (mortgage or rent and homeowners insurance)
- Food (groceries only)
- Utilities (Electricity, natural gas, water and sewer, phone, and internet)
- Transportation (car payment, oil, gas, and insurance)
These four groups of expenses are necessary for us to live our lives. When the going gets tough these are non-negotiable. Of course, if you’re driving a brand new, gas-guzzling vehicle perhaps you could trade it in for a more reasonable form of transportation. In general, though, you need a way to get around and get to work so it belongs in the needs category.
What you want
This second category includes everything else in your budget. For me, this tends to be a fairly long list. And it can be painful to look at if you’ve never assessed your spending before. If I ever can’t figure out why we keep feeling like we’re falling behind, then this is where I start. And inevitably the supposedly tiny charges always seem to add up to exorbitant total amounts at the end of the month.
If you need to cut your budget then this is where you start. The items in the need category might feel like larger charges but they are important to living your life. The items in this category might make life fun, but for a short time, you might just need to tighten the belt a little.
And for others of us, our belts might already be tight. If you’ve cut everything and still need to cut more then it might be time to assess the items in your need category. But for now, let’s assume that you’re like the rest of us and there is room to cut in the wants category.
Some examples of what you’ll likely see in the wants section include:
- Food (eating out and fancy coffees)
- Travel
- Entertainment
- Monthly subscriptions
If you’ve been around my blog long enough you know my passionate dislike against anyone who wants to come after my fancy coffee! I would much rather cut the cable bill than give up my coffee completely. However, when we went down to one income I did concede and cut back drastically on how much I got coffee out. Now, I make it at home with my trusty Keurig.
I also found that cutting our monthly subscriptions saved a bunch on those pesky tiny charges that always seem to come up at the worst times. The best part about most of these subscriptions is that there isn’t any penalty for stopping and starting as many times as you want.
I don’t know about you, but my kids seem to go through phases when they’re obsessed with something for two months and then forget about it for six months only to return again. Once I see that nobody seems to log in to certain subscription services such as Noggin or Disney I will cut it.
Then just wait until someone comes to you and says they want to watch something and can’t. And you can quickly start back up your subscription. I have found that all of these services save my login information as well as my payment information. So it takes just a minute to get it up and running again.
Savings and debt
Now the true letter of the rule is that your minimum debt payments need to go into the “needs” category. But, to be honest, that didn’t work for me. And if you’re staring at a pile of debt then it might not work for you either.
Also, at the end of the day, my priorities are to feed and care for my family. Worrying about your credit score if you can’t afford groceries or your heating bill is a little like stopping to water your flowers during a zombie invasion.
Seriously, just get going!
So, all my debt payments go in this category for me. I also have savings in this section which goes against the grain, so bear with me while I explain my reasoning!
One of the other financial gurus I like to follow is Dave Ramsey. I like his no-nonsense attitude when it comes to managing your money. And I think he is spot on when he says that 90% of the time our biggest problem in finances is staring back at us in the mirror! He can be brutal but sometimes we just need a little brutal honesty in our lives.
And one aspect that I appreciate in Dave Ramsey’s plan is his emphasis on starting your debt reduction plan by building a little savings account first. This might seem counterintuitive, but the fact is that over time, emergencies will crop up. You’ll run over something in the road and pop a tire. Or your kid will sprain an ankle and need extra doctor’s visits adding unexpected expenses to your monthly budget. And if you’re living close to the cuff even a small emergency can break the bank.
Getting started in the real world
So start with determining your minimum monthly payments and put them in this category. Hopefully, your minimum monthly payments equal less than 20% of your take-home pay. Whatever you have left after the minimum payments goes to your debt reduction plan.
And you begin your debt paydown by saving up $500 in a separate savings account (or even in your sock drawer if you have to!). Once you have this saved up, put everything that you have extra (after the minimum monthly payments on all debts up to the 20% total) towards one debt.
How you pick which debt is up to you. You can pick the smallest one or the one with the highest interest rate. What I would challenge you to do is look at each debt one by one. Which one gives the biggest knot at the bottom of your stomach? Start there.
This way you can knock it off your list and never look at it again. Half the battle of budgeting is moving past the emotion of it all. And when you have a particular debt that is weighing you down then it’s worth it to just focus on that one first. This doesn’t have anything to do with budgeting and you probably won’t hear any of the gurus saying this. But in all their financial brilliance sometimes they forget how the rest of us live in the real world.
A quick example of the 50/30/20 budget plan
Now that we know what goes into each category let’s look at a real-world example of how you should split up your monthly budget.
So, if you make $3,000 a month after taxes then you’ll split your budget into these three categories:
50% = $1,500 on necessities such as your rent, utilities, transportation, and groceries
30% = $900 on wants such as eating out, cable, traveling, and subscriptions
20% = $600 on debt and savings
For a lot of us, this can become a brutal wake-up call. If you find that you can’t quite make everything fit into each of these categories then you might need to reassess your priorities. What is truly necessary and what just makes life a little easier. For me, this includes any pre-packaged dinners on my meal planning list. Do I really need to buy them or can I make something similar for less money?
Another place that always seems to get out of control is when I run to the store for “just one thing” mid-week and then end up spending too much. I do all my meal planning and grocery shopping on Sunday afternoons. Unfortunately, it always seems that I have to run to the store mid-week for something I forgot. And then I see something else, and the destructive cycle continues.
So, take a good look at where you’re putting each expense. Sometimes you can rationalize certain expenses into either category. A great example is the cable and internet bill I mentioned earlier. Technically I need to have internet access to work. But we don’t need cable. Unfortunately, these two utilities are packaged into one bill. Can you cut back on how big your cable package is while still keeping your contract intact? If so, then give them a call and ask about your options.
Take the guesswork out of your budget
Trying to figure out how much you should budget for certain items is a drag. But with this method, you can make it super easy. Just look at each item and figure out what category it belongs in then make sure it fits your income.
The hardest part is that sometimes you might feel like you’re trying to shove a round peg into a square hole. Especially if your income is super small and your bills are quite a bit larger. If you constantly find yourself with more month than money, and you feel like you’ve already cut back as much as you can, then consider figuring out a way to make money from home.
