I’ve said it before and will continue to say it: budgeting should be easy and flexible. One of the top reasons people don’t budget – or stop after a period of time – is that it feels rigid and inflexible. That’s a shame because budgeting should be flexible! Today I’ll explain a budgeting option called the 50/20/30 rule. If you like flexibility, you’ll love this plan!
The 50/20/30 rule budget
When I talk about flexibility with the 50/20/30 budget, I really mean it!
In fact, there are only THREE categories for grouping your expenses with this option. Yeah, really.
How’s it work?
You allocate a percentage of your spending on each of these categories. Then within the categories, you have complete flexibility.
It’s a simpler model for people who might get frustrated with the detail of budgeting. Rather than having 20, 30, or more (we have even more!) categories for your spending, you only need to deal with the three.
What are the categories?
I’m glad you asked.
Budget Category 1: 50% = Living Expenses
This is the largest category because for most people it consumes the largest amount of our income. 50% might sound like a lot of money, but this category group adds up fast.
Living expenses are going to include the basics – like the things we wrote about in the 4 Walls of Budgeting post. Mortgage or rent, utilities, food, clothing, and transportation.
Many financial professionals recommend that your rent or mortgage is kept to under 30% of your take-home pay. Ideally, it would be 25% or less because this is a huge expense on a single item and being able to keep that low can impact all other areas of your budgeting.
Beyond the “4 Walls,” I would recommend also including regular fixed expenses that are required to reasonably and safely live your lives. For example, insurance should go here. Monthly medical insurance payments, homeowners’ or renter’s insurance, and automobile insurance are expenses that are basically required for many families to feel safe and be protected.
If you take medicines regularly, include those here too. This category is all about basic living needs – and that certainly includes your health!
Budget Category 2: 20% = Financial Goals
Yes, I know. This deviates from the popular “pay yourself first” mantra that some people in the personal finance space love to throw around. The reality though is that you need to cover basic living expenses first. If you aren’t meeting your basics needs then you really need to defer financial goals until you can get the basics covered.
Among others, the financial goals in this category are going to include items like:
- Saving money for a down payment on a house
- Saving and investing money for a comfortable retirement
- Contributing money toward your child(ren)’s college plan
This category will also include debt payments. Yes, those are financial goals too. Hopefully, you have the goal to (at some point) pay off your debts. Student loans, car payments, credit card bills, etc. will fall into this category.
If your debt obligations are already pushing the limits (or have gone beyond the limits) of this 20% rule, you should step back and take a look at your situation. Developing a plan to pay off some or all of that debt should move higher on your personal priority list.
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Budget Category 3: 30% = Personal Flexible Spending
Essentially, everything not counted into one of the first two categories would wind up here.
This is largely discretionary spending – expenses you can choose or not. As you’ll see in the examples below, there are some expenses you HAVE to make, but they don’t fall into the other two groups. Those will also show up in this category.
Budget category 3 is where your vacation, dining out, entertainment, and “fun money” (random cash allowance that a lot of people like to carry) would go.
You will also put less obvious spending in this category. Things like birthdays and holidays, cable tv, home furnishings, and similar will land here.
How about unexpected expenses?
Car repairs? Medical costs beyond insurance or regular medicines? Yes, those should be grouped with this category also.
Who is the 50/20/30 budget for?
If you are struggling a bit to make ends meet each month, this isn’t for you.
When you need to really focus on maximizing your money to divert all available cash to paying down debt or achieving a large financial goal – this isn’t for you.
This budget model is more appropriate for people who’re already fairly financially fit.
People who have control of their finances already but want to make sure they are prioritizing and allocating their money into important areas, within reasonable ratios, would benefit from this model.
My personal thoughts on this…
My wife and I love a detailed budget. We like to allocate specific amounts to food, clothing, vacation, etc. I wouldn’t be satisfied with a budget that had only three categories.
That said, I like the guidelines that this budget suggests. Here’s what I’d suggest:
Take your more detailed budget and assign each category into one of the three groups above. Then total the amounts in each of those three groups and calculate the percentage of your total spending for each. Now compare that percent of the group to the 50/20/30 rule guidelines.
Are you already in those ranges (or pretty close)? If so – GREAT.
If not, perhaps it would be a worthwhile exercise to take a look at how you’ve allocated your budget.
When you’re out of range…
Are you spending more than 50% of your income on your living expenses? We’ve talked with people who spend almost 50% on their mortgage or rent alone, so we know it happens. That can push your living expenses total upward of 70% – which leaves very little room for financial goals and enjoying life.
Are you spending less than 20% on financial goals? If you have a specific written plan and you’re on track with the plan, then perhaps less than 20% is fine for you. Most people are best served by allocating at least that much to financial goals. Some people need to allocate 20% just to achieving their retirement goals – let alone debt service.
In closing
The best value of this 50/20/30 budget, in my opinion, is to have guidelines for an even more detailed budget.
But, if you’ve got a good grip on your financial situation already, and you want extreme flexibility in your budget (perhaps you wouldn’t do it otherwise) then this model might be perfect for you.
What do you think about this model? Do you use it already? If not, would you consider using it?
I don’t use this budget myself, but I have recommended it to first time budgeters. I like to suggest using the 50% and 30% as ceilings and the 20% as a floor. Once you hit that it is easier to build more towards your savings goals and cut back elsewhere. Definitely a useful budget for beginners or people who are scared off by the idea of budgeting.
Absolutely Matt – great point. I like the floors and ceilings concept; very smart! Thanks for sharing!