There is a reason that household budgeting advice is so prevalent on the Internet.
Let’s put it this way: If everyone was budgeting, there would not be a need for so much budgeting advice. And the main reason so much advice is out there is because the topic is known to be a heavy-traffic generator. Which means many people want to read about budgeting, but it appears that not many people want to actually do it.
Why? Well, to be fair, budgeting is never easy to do; it first of all assigns areas where money is to be spent, and very few of us want to actually admit this. We want to believe we have free rein to spend our money however we see fit. Another reason is that most budget advice has to do with being as specific as possible in putting your money in various categories, and that can often seem complicated and overwhelming to consider the right amount for one specific category over another one.
The 50/30/20 Budget
Budgeting is valuable to virtually any family or household dynamic, because we have racked up so much collective consumer debt over the years. Budgeting helps us all with discipline, spending only the money we make and no more. For those who know that a budget should be good for them in terms of financial discipline and organization (it is easier to keep track of spending when it’s accounted for up front) but don’t need the specificity of some budget approaches, we’d like to introduce you to a compromise budget, known as the 50/30/20 budgeting method.
With this budget, you split up your monthly take-home pay into three categories reflected by percentages, and you can spend the money in each category how you see fit according to priorities. Let’s look at each of these 3 categories in detail.
The 50 Percent: Survival
For the sake of easy math, we’ll round down the average household after-tax income to $3,000 per month. The first category says that no more than half of your monthly take-home pay (in this case, $1,500) should be dedicated to those things that are the most essential for survival – this is food, shelter, basic utilities, transportation and basic clothes. You have to pay your mortgage and electric bills to keep lights on and shelter, but some of the other money can be moved around within the sub-categories as needed, but you cannot go over 50 percent of your monthly income.
The 30 Percent: Lifestyle
In our example, this budgeting category says that no more than $900 a month, or 30 percent of your monthly pay, should go toward those things that enhance your life beyond the survival needs. Among these expenses are vacation savings, cable television, cell phone plans (yes, you could use a land line instead, or a more basic phone plan), any hobbies, toiletries, membership or periodical subscriptions, etc. Whatever you spend to make a better life for yourself than just surviving goes in this category.
Be fair and reasonable about this; if you find yourself bumping against your ceiling, be willing to make that tough decision to cut something out and be as objective as possible in making that call.
The 20 Percent: Planning
Using our $3,000 monthly example, no more than $600 or 20% a month goes into the third category, which is long-term saving and planning. This category includes contributions to IRAs or 401(k) accounts, college funding plans for children, long-term care and paying off debts, as examples. Some people say that this category should be taken care of before the 30-percent category, and you might read others who say saving should be handled first even before survival expenses. For you, handle it however you see fit. But remember, getting out of debt and saving for your future are keys to financial freedom, so you don’t want to take this category lightly.
For our scenario, since you are being locked into a maximum amount for each category, it doesn’t really matter what order you fund the categories, but if you can cut your lifestyle category down to where you only spend 25 percent instead of 30, then you could use that extra 5 percent in this saving/investing category. Savings are important enough that it might be wise to be flexible in the other categories first in order to make sure you have 20 percent available for savings or debt repayment, at a minimum.
This budgeting plan is great for young people who are out on their own for the first time, single working parents, or those who are very creative and don’t like budgeting for the perceived “structure.” There is a framework, but there is also room for creativity and flexibility to make this budget work for your needs, which might be slightly different from one household to the next. One household might need more savings, while another household might need more money to pay off debts and another household might have no debt and not need much savings so may have more money for lifestyle.
What To Watch Out For
Things to watch out for with this budgeting method is it gives the flexibility to the family in that each family can be subjective to their own biases in each category. For example, if you have debt, the recommendation might be to use the whole 20 percent part of your budget toward paying the debt as quickly as possible, but most households will find it necessary to justify putting money into investing or savings in that the family should be able to do both at the same time. If you struggle to prioritize on your own, then you might require a more detailed budget plan to hold you accountable for all of the money you spend.
As for the percentages between categories, you might have to do some tweaking of your expenses and savings in order to get each category in line. If you find your lifestyle is too expensive, like you are spending 45% if you income in this category, you will have to review it and make some changes. In the short term, it might not seem like a big deal to stray from the predetermined category percentages, but over the long term, it will have a big impact on your finances.
In a world where jobs are harder to come by, and those who have jobs find their hours hard to come by, and with many Americans still carrying debt and not having adequate savings, putting together a budget – any budget – can be useful in keeping people in their homes, fed, and at least making some progress on either the debt or the savings. The economy today is not made for free spenders.
[Photo Credit: fotocitizen]