There are dozens of choices when it comes to budget plans. If you’re still looking, or are completely new to the concept of budgeting, let me re-introduce you to an age-old budgeting guideline: the 50/20/30 rule. Even though it’s a classic, it bears a fresh look, especially through the lens of the modern American’s financial outlook.
Three Categories and What They Contain
The 50/20/30 rule splits up take-home pay into three large spending categories — fixed costs, financial goals, and flexible spending. Here’s a list of what each contains.
- Fixed Costs (50%) – These are the expenses most vital to your survival, which don’t vary from month to month: mortgage, rent, vehicle payment and utilities. Some versions also include non-essential monthly subscriptions, since they require a monthly commitment and the amount doesn’t vary unless you choose to discontinue them.
- Financial Goals (20%) – This category includes any monthly payments and contributions toward improved financial health: 401K and other retirement accounts (from post-taxed income), extra payments on credit card debt or student loans, building an emergency fund, and savings goals such as a down payment for a home or funding an education.
- Flexible Spending (30%) – This category includes expenses that vary from month to month: groceries, gas, eating out, shopping, hobbies and entertainment.
Some Pros, Some Cons
One of the best traits of the 50/20/30 guideline is its simplicity. There aren’t dozens of categories to micromanage, but it will still get the job done. This is a great starting point for everyone, especially if you’ve never stopped to look at the bigger picture of your spending balance.
Nonetheless, the plan may not work for everyone. Keeping fixed costs under 50% and saving 20% might be unreachable to many people in their present circumstances. On the other hand, some advisors think the plan should be more like 50/30/20 – saving more and leaving less for flexible spending. For that matter, choosing a more minimalist approach to living (smaller house, older cars) can reduce fixed costs well below 50%, especially among those with higher-than-average incomes. However you choose to view it, the 50/20/30 rule is best described not as a strict budget, but a helpful guideline.
How to Use 50/20/30 in Today’s Financial Landscape
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