I came across an article on MSN called the 50-30-20 Budget Fix. The 50/30/20 budget is another way to allocate one’s income and the writer claims that it is a simple way to build “financial security” and reduce the “chances of a setback.”
The 50-30-20 Budget
This budget is one where your needs, wants, and savings (or debt repayment) are allocated 50%, 30% and 20% of your salary respectively. The article lists the following steps to getting started with the 50/30/20 budget:
- You have to start with your after-tax income which is your gross pay less taxes plus the expenses which were deducted (e.g. health insurance, pension etc.). This gives you your after-tax income.
- Limit your must-have expenses to 50% of after-tax income. Mortgages, loans, , tuition and utilities etc. classify as must-haves. It looks as though these are your “needs.”
- Allocate 30% of your after-tax income to your “wants.” The writer lists entertainment, vacation, clothes and eating out as examples of wants. She also notes that some portions of your ”needs” can overlap in this category. Her example was that a basic phone service might be a need, but additional perks like caller waiting and caller I.D might not be.
- The final 20% of your after-tax income is for savings and debt repayment – The focus here is to eliminate debt, save for your retirement and build your emergency fund.
Can the 50-30-20 Budget Work?
If we assume that my monthly salary is $2,000 per month, the 50/30/20 budget would look like this:
- 50% – Needs – $1,000
- 30% – Wants – $ 600
- 20% – Savings and debt repayment – $ 400
It seems like a good idea, but I would not start with an after-tax income. Instead I will apply the 50/30/20 to my gross pay. My reason for doing this is simply because the only “expense” that comes from my salary is pension. And it’s not a huge figure which would severely alter the course of the budget.
I took my current budget and the proportions are nowhere near the 50-30-20 proportions. My budget is a 67.21-13.21-19.19. I’m not sure if I will ever be able to change up my budget to get to the 50-30-20 (unless I get a huge raise).
My needs are a mixture of a loan, tuition, “bills” and insurance and are not flexible. The wants are a bit more flexible and I can allocate some of this to savings. I think that it’s a great exercise to see where your salary goes and how your salary is allocated.
Have you ever tried the 50-30-20 budget?