Budgeting can be the hardest task you need to do. The dreaded feeling of looking at the growing debt or how much you actually spent that month and coming to terms with it. Unemployment, calling your Mother, or figuring out what to watch on Netflix all fail in comparison to beginning that budget.
It can be very intimidating to look at all those numbers on a sheet of paper and try to make sense of it, let alone organize it into a budget for months to come. That’s where budgeting rules come into play. Many people have come out with recommended categories and percentages to place each of your finances in each month to help you.
These are normally percentage breakdowns to better organize where your money should go and not waste a single dollar. Dave Ramsey’s household budget for example, suggests spending 25-35% of your monthly income on housing. He went ahead and broke down everything into 10 categories, from food and utilities all the way to insurance and recreation.
There are countless more budgeting percentage breakdowns you may not even know where to start or which is the best one. I can tell you there is no wrong answer. A budget breakdown is going to unique and specific to you. These are all suggestions from people that worked for them.
The 50/30/20 Rule
One of the more popular breakdowns, and one I followed when I first started out, was the 50/30/20 rule. That is you spend 50% of your after-tax monthly income on ‘Needs’, which are living expenses, like housing and utilities. 30% is towards ‘Wants’, like spending on takeout, entertainment, and anything else. 20% is dedicated to saving, whether that includes debt repayment, retirement or investing.
This is a good start and not overly complex. Having too many categories can get confusing for first time budgeters. Creating budgets is already confusing enough without adding more factors in which to organize your finances.
I found that over time this became too simple for my life and customized it more to my lifestyle. For example, I spent less than 50% on fixed expenses so I lowered that going forward. This is a great foundation to organize your spending each month and allocate your money properly.
If you’re a spender, and like to pay a decent amount on takeout or shopping, this 30% of your monthly income can go a long way. I would however strongly recommend toning that shopping tendency down a bit to avoid spending too much and going into debt. You should dedicate most of this “Want” category towards Cable bill, phone bill and other expenses that aren’t necessarily ‘Needs’, but important to your current lifestyle.
This budget lets you maintain a normal lifestyle that doesn’t impede much on restrictions. Your life should not be affected drastically by following this 50/30/20 rule. It’s more of a guideline towards a better and more efficient use of your money.
It’s important to understand what exactly is a want and what is a need. A good indicator is to ask yourself is what you want to spend money on will severely impact your life. Not paying a minimum credit card bill or paying your mortgage will result in poor credit score and being homeless. These are important and a necessity. Having cable or an iPhone, are definitely convenient and used daily, but you can live without them.
20% of your after-tax income will go towards saving. This category also includes the extra payments on your credit cards that exceed the minimum amount. So if your credit card monthly payment is $50 and you pay $100, that extra $50 will be included in the “Save” category.
One of the complaints some people have with this structure is it may be too abstract. There are no clear lines between a want or a need and often causes confusion. Some people prefer to ditch this breakdown and opt for something more structured and specific. I find having too many buckets to place your money in is too complex and intimidating for new budgeters. You want something that will help form the mentality of budgeting and keep you going long term.
Let’s look at a sample breakdown. If you bring in $5000 after-tax income each month, your breakdown would look like $2,500 “Needs”, $1,500 “Wants” and $1,000 “Save.”
Customizing the 50/30/20 Rule
After carefully reviewing my monthly income and understand who I am and what I spend my money on, I was able to tweak this budget rule to fit my lifestyle. I only spend about 30% of my ‘Needs’ each month and try to limit my spending, so I don’t require the full 30%. Debt repayment and saving for a down payment on a house is what I’m mostly focused on and decided to change up my budget to accommodate that. I would suggest sticking with the original 50/30/20 rule for a few months before changing it up. That way you can get used
Once I made some changes, my monthly budget looked more like this: 30% Needs, 20% Wants, 50% Save. I am certain this categorization won’t last forever however. Once I am in a house there will be more expenses, taxes, and other unexpected costs. Don’t even get me started about how much children will change this breakdown too! But that’s the beauty of budgets. They are flexible to fit your lifestyle and still come out ahead. Finding what is important to you and setting goals lets you allocate just the right amount each month.
After several more months of fine-tuning this structure, I decided my budget needs even more structure to allow for more precise spending categories. The 50/30/20 rule doesn’t work for everyone, but in my opinion, it’s the best introductory budget breakdown. Some may use this for the rest of their lives, while others want to be stricter with where every single penny goes.
What type of budget breakdown do you use?
