Before we start, I already know what you’re thinking, “Olivia, you’re not good at saving money. Is this going to be a huge flop like the ’No Spend November‘ challenge?” And my answer: potentially. I always do my best to be transparent when it comes to money… and I am a work in progress! I cannot guarantee this spending plan is going to be my “a-ha moment” where I get my life and finances together, but it is worth a shot!
The Budgeting Method I’m going to use is the 50/30/20 rule. This rule was created by U.S. Senator Elizabeth Warren, and was published in her book: All Your Worth: The Ultimate Lifetime Money Plan. It’s a way for families to plan for their financial future. It’s a simple, understandable approach to budgeting, and is great for those who find money management daunting!
The basic rule of thumb is to divide your monthly after-tax income into three spending categories: 50% for needs, 30% for wants, and 20% for savings or paying off debt. Unlike the “No Spend November” where I had to quit spending cold turkey, this rule helps manage money simply and sustainably. I can still spend money on my beloved gym clothes with a more disciplined approach.
So let’s break this down a little more. Let’s say your monthly income is $2,700. You have $200 taken out for your 401(k) contribution, so $2,500 is deposited into your bank account each month.
50% Needs: Needs are what you can’t live without.
• Utilities (electricity, water, etc.)
Needs Spending Threshold: $1,350 ($2,700 x 0.50)
30% Wants: Wants you can live without – but you don’t want to be without them!
• Dining out
• Clothes Shopping
• Entertainment Subscriptions (Netflix, HBO, etc.)
Wants Spending Threshold: $810 ($2,700 x 0.30)
20% Financial Goals: The last 20% is put toward achieving your savings goals or paying back debts.
• All savings (retirement contributions, saving for a house, etc.)
• Debt payments
Savings Goals Spending Threshold: $540 ($2,700 x 0.20)
After calculating these numbers, it’s super important to see how well your spending is already aligned with these targets! Look at your latest paystub and sort out your transactions into the three categories. Remember – a want is not always an extravagant purchase! It can be a basic nicety that allows you to enjoy life. Are my gym clothes a “necessity”? Sadly, no, so they fit in the “want” category.
Overall, the 50/30/20 rule seems easier to implement than other budgeting techniques I’ve seen! I don’t have to spend time figuring out specific categories for my finances! Rather, I only have to focus on those three buckets. It’s a great way to get your feet wet in the world of budgeting and can help achieve your budgeting goals in a quick and easy way! So, let’s put this into action and see how well we do!