During my blogging journey, I’ve learned that not everyone loves budgeting as much as me. And that’s fair enough! I know a lot of people who hate budgeting and don’t know where to begin. But I don’t think that a fear from budgeting should keep you from managing your finances well. If you are struggling to come up with an easy to follow budget, then here is the perfect budget for you called the 50/20/20/10 budget.
This budget method breaks down your budget by percent of income. Each percent goes to a different larger category in your budget. Rather than breaking a budget down by each smaller category (i.e. food, insurance, gas) it breaks down your budget in a larger overseeing categories.
So you spend a percentage of your budget in a certain larger category to have it add up to 100%. This budget method is great for free spirits who don’t love to track many small categories, but like to see how they’re doing at the bottom line.
Here are the 4 categories and percentages that make up the 50/20/20/10 budget.
50% – Necessary Expenses
This is where you need to spend money to keep up with the day to day. Things like rent, groceries, gas, car insurance, phone bills and other necessities go in this category. Note that this category should not go over 50%. It is so important for your budget and reaching your financial goals that you don’t go over 50% of your take home pay on necessary expenses.
If you are over 50% of your income on these expenses, do everything you can to get it lowered! You can cut your grocery budget with intentional meal planning. Lower your transportation costs by maybe taking public transit. And lower your rent costs by moving to a different rental unit or taking in an additional roommate!
20% – Financial Goals
This is where you get to spend your income on reaching your financial goals! This includes everything from paying off debt, saving for emergencies, saving for retirement, or working on paying off the mortgage sooner! It’s important to put a portion of your monthly income each month to reaching your financial goals.
So which goal do you work on? Take them one at a time! For those of you who follow Dave Ramsey’s program, this is where you take your extra money to put to the baby steps. If you have debt, work on paying it off with this 20% of your budget. If you are already debt-free, use this 20% to save for your financial future!
Make sure that you are using at least 20% of your budget to put toward reaching your financial goals. This is honestly the reason why you need a budget in the first place! Know where all your money is being spent so that you can know exactly how to tackle your financial goals!
20% – Fun Spending
This is the category that you free spirits and spenders are going to love! This is the category where you get to enjoy all things fun related! Things like eating out, clothing, travel, entertainment, Starbucks and basically anything that is more fun than paying bills.
Now, if you’re working on getting out of debt, I would highly suggest lowering this category to increase your financial goals percentage. Now that Jacob and I are debt free, we still only spend 12% of our monthly budget on fun! Just because we are still trying to accomplish our financial goals of saving. And while we only spend 12% on fun, we don’t feel that we are stuck at home not enjoying our lives. You can still have fun and not spend a ton.
I would definitely suggest keeping this category at no more than 20% of your budget so that you still can continue to reach your financial goals. But it’s also important to give yourself the permission to spend on fun. And this type of budget does exactly that!
10% – Giving
The last percentage category of the budget is giving! And while it’s last, it is one of the most important. I preface this with saying that I am a Christian and make it a priority to always give.
When Jacob and I were on our debt-free journey, we still made it a priority in our budget to give 10% of our income. Most of it was to our local church, but some funds went to other organizations to sponsor children in Africa. We even created a sinking fund where we saved money each month that we could give away whenever the opportunity came up. We were able to say yes to giving when we said no to ourselves a lot.
To this day, we still make giving 10% a priority and I would encourage you to do so! Even if you’re not a Christian. Giving puts everything else in perspective and I believe that it truly makes you a happier person.
The 50/20/20/10 Budget At Work
The 50/20/20/10 budget is pretty easy to set up! Take your after-tax monthly household income and multiply it by the four percentage categories. Your budget is set up in a matter of minutes! Then as the month goes on, keep track of which category your spending goes into. There are only 4 options so it’s so much simpler!
If you get stressed or overwhelmed by the complexity of a budget, make it easy with following the format of the 50/20/20/10 budget!