Why Is Creating a Budget Helpful?
Remember being a little kid and thinking that when you became an adult you would buy anything you wanted? Then we became adults and realized that being an adult is super expensive, and that was before inflation kicked in. Suddenly our dreams went from buying everything we wanted to wondering where our money goes and never feeling like we have enough. Luckily, there is a way for us take better charge of our money… creating a budget.
Here me out, I know that’s as anticlimactic as it gets. But budgeting helps you figure out what you need to spend money on, what you love spending money on and should prioritize, and what you’ve been spending money on but don’t need to. The goal of budgeting isn’t to cut spending to the bare bones, it’s to make sure you have money for the things that are important to you. That’s the exciting side of budgeting and the thing most people forget about.
However, it can be intimidating to start budgeting, so that’s where I’m hoping to help. In this article, I’ll discuss how to create your budget, helpful rules of thumb for assessing your spending, and resources to use to track your spending. At the end, I provide a free budget template you can use to track your monthly income and spending and achieve your financial goals. Before I dive in, keep in mind that I am not a financial advisor. Check with a financial professional before making any financial decisions.
My Budget Origin Story
I’ve been budgeting since I was 12-years-old and started my first job as a babysitter. My rule was that I had to save half of everything I earned. If I ever saved less than half, I had to “pay” my savings back until I made up for it. I was such a fun kid, can you tell?! However, those savings helped me take a bunch of cool trips as a teenager. They helped pay for a trip to London and Paris. Plus, this habit set me up for a lifetime of good financial habits.
I certainly can’t save 50% of my income anymore. However, I do save close to 30% every month. I don’t recommend that savings rate for everyone. In fact, I know my savings rate will go down dramatically when I have kids and a house. However, many of us can save more than we currently do by just being a little more intentional about our spending and saving.
So how can you set up a budget that will help you reach your financial goals?
What is the 50-30-20 Rule?
The 50-30-20 budget rule is a great way to assess whether your spendings habits and savings are on target for your goals. Specifically, with this budgeting rule, you aim for your necessary expenses to make up about 50% of your take-home pay. Non-necessary expenses comprise 30% of your monthly after-tax income. And savings and debt payments make up the other 20%. Those savings include things like your retirement contributions and emergency fund.
Of course, your own budget is likely to differ from this basic rule of thumb depending on things like the cost of living in your area, whether you have kids, and more. Nevertheless, financial experts recommend that you stay within 50-60% for necessary expenses, 20-30% for non-necessary expenses, and 10-20% (but ideally on the higher end) for savings targets.
While this is a simple budgeting method, it does have a powerful relationship with financial security. Indeed, those who spend above these targets often feel financially insecure. Financial expert Ramit Sethi has a great podcast called I Will Teach You To Be Rich where couples discuss their financial situation. Many of them spend far above 60% on their necessary expenses and feel constantly stressed about money as a result.
In contrast, those who spend below these targets may feel deprived. Thus, having these benchmarks in mind is an easy way of making sure your monthly expenses are working for you and your financial plan.
Easy Steps for Budgeting Based on the 50 20 30 Rule
Now that you have a sense of the 50 20 30 rule, how do you create a budget around it? Luckily there are a few simple steps to help you assess your spending and develop a budget.
1. Decide on a budget tracking method
Your first step is to decide how you want to track your budget. For example, you can use an Excel spreadsheet, Google sheets, a piece of paper, or a budgeting template. I’ve even provided a 50-30-20 budgeting template for you below! If you like analog stuff like I do, then Clever Fox’s budgeting journal is amazing.
2. Calculate your necessary expenses
Next, calculate your monthly necessary expenses. These necessary expenses include things like rent/mortgage payments, utilities, food, and health insurance. Take a look at your bank account and credit card statements over the past few months to help you calculate a monthly average.
As you are assessing your expenses, try to think about those pesky annual and unexpected expenses that are easy to forget about. For example, I frequently forget about paying for things like car tabs! You may find it useful to build some wiggle room into your necessary expenses budget to cover those.
Now compare, do your mandatory expenses make up 50-60% of your monthly take-home pay? If they make up more, that’s a sign that you spend too much on those expenses. You may regularly experience financial stress and this can be a big reason behind that. If you are also spending 20-30% of your income on non-necessary expenses, you especially need to cut back. Review steps 5 and 6 for suggestions if needed.
3. Estimate your non-necessary expenses
Non-necessary expenses include things like eating/drinking out, gym memberships, presents, or a new outfit. I know it sounds like this category basically includes anything that makes life worth living. However, keep in mind that these are non-necessary because you can survive without them, not because they are not important. Calculate a monthly average for these expenses.
As you are reviewing, note your main categories of non-necessary expenses. For example, do you largely spend money on eating out Perhaps you spend a lot on gym memberships. Or maybe buying clothes is your Achilles heel. Making note of these main categories will help you for the steps below.
Once you have a sense of your monthly average, ask yourself whether that amount makes up 20-30% of your total after-tax income. If it makes up more, you likely want to cut back. This is especially the case if your necessary expenses make up 50-60% of your income.
4. Assess your values
Before deciding on expenses to cut, it helps to think about your priorities. For example, you might prioritize health and wellness, time with friends and family, travel and cultural experiences, self-improvement, etc. And these values could manifest themselves in your expenses by going out to nice dinners with your partner once a week, buying fun presents for friends and family, monthly massages, or jetting off on an international trip each year.
To the best of your ability, try to preserve those things that bring you the most joy. They truly will be the things that give you the most bang for your buck. Financial expert Ramit Sethi talks about this as living your rich life.
5. Cut back on necessary expenses if needed
On average, people’s 3 biggest expenses are housing, food, and transportation. Consequently, the best way to save money is generally to cut back on these. Downsizing your home, moving to a lower cost area, or selling a car are all big ways of transforming your expenses. On a smaller scale, you can often lower insurance premiums by switching companies or negotiating with your current company. You can sometimes even negotiate your rent.
With food, you can use coupons. I know it sounds quaint, but we use the Fred Meyer app to get major deals and often save $20-$30+ each week from coupons and sales. I also recommend buying generic brands and meal planning. For example, Andrew and I have figured out that if we make 3 dinners a week, with leftovers, that gets us perfectly through 7 days with rarely any food waste. We also choose recipes with overlapping ingredients, meal prep our lunches on the weekend, and take advantage of foods that are on sale or cheap at the time.
You can check out my post on money saving tips for creative ways to cut back as well.
7. Cut Your Non-Necessary Expenses
If you spend beyond your means on non-necessary expenses, ruthlessly cut any non-necessary expenses that don’t bring you joy. You can think of this as Marie Kondo-ing your budget.
For example, you could use one streaming subscription at a time and cycle between them. This is something we do! If you eat out a lot, you might consider meal planning more often. Similarly, if you buy a lot of impulse purchases, consider creating spend days each week or month where you review items in your online shopping carts and don’t buy impulse purchases outside of those days.
8. Prioritize Saving and Outstanding Debt
Ideally, about 20% of your take-home pay should go towards saving and debt repayment. If you have any debt, especially high-interest credit card debt, you may want to consider paying that off as one of your first priorities. Indeed, interest payments will quickly eat up your budget. Plus, paying these cards off can improve your credit score!
In contrast, debt like your student loans may have very low interest rates. Consequently, you might prioritize saving and investing over paying that debt off right away if that’s the case. A financial advisor can help you best navigate these decisions.
Another rule of thumb is to save 10-15% of your annual income towards retirement. Luckily, that percentage includes any employer match you might receive. You should also have an emergency fund that covers 3-6 months of your bare bones living expenses. Consequently, prioritize having an emergency fund and retirement savings in your budget when you have the resources to do so.
Finally, consider any longer-term savings goals you have. Maybe this is saving towards a down payment on a house, allocating money to a big annual trip, maxing out retirement accounts, etc. For more info on saving for your goals, see my post on saving for the short-, medium-, and long-term.
9. Automate Your Spending and Saving
You can assess whether you’re meeting your spending and savings goals by tracking your expenses manually in a spreadsheet, with apps (You Need a Budget is a popular option), or by creating automated systems. Most banks now have options where you can create “envelopes.” Your bank will automatically divert percentages or dollar amounts of your incoming money to those envelopes.
Those envelopes could align with the necessary, non-necessary, and saving buckets we just discussed. Alternatively, you could create buckets as specific as “Holiday Presents” or “International Vacation.” The cool part is that these envelopes let you see exactly how much money you have available for things like necessities, guilt-free spending, savings goals, etc. without having to manually track.
Free 50 30 20 Budget Worksheet
One of the easiest ways of assessing your monthly expenses is to use a budget worksheet. Consequently, I’ve provided a free 50 30 20 rule spreadsheet below. Simply input your monthly take-home pay at the top. Make sure to include any pay you get from a side hustle, interest payments, etc.
Next, include your necessary expenses in the indicated section. Note that you can include different categories of expenses within those necessary, non-necessary, and savings buckets if you would like. However, the most important thing is to get a reasonably accurate picture of the amount of money you spend on these broad categories. The details are slightly less important. Then do the same thing for your non-necessary expenses and savings/debt repayments. If you have an employer retirement fund, make sure to include that in your savings.
The budget calculator will then indicate whether you are spending within the recommended percentages. I’ve also included a budget example on the second sheet to highlight how this all works using numbers that are very similar to my own.
Of course, the hardest part is then taking this information and using it to build your budget plan for the next month and the month after that. Make sure to use this information to inform your spending going forward. Strive to hit those 50/30/20 spending targets, cut back where needed, and even seek opportunities to grow your income if you continuously fall short. You can also view your budget as a living entity. After you have a few months experience, you can evolve your spending and savings targets based on your past performance.
Final Thoughts on Creating a 50 20 30 Budget
Having a budget is one of the best ways of building a financial plan that can help you meet your long-term goals. While it requires some start-up costs to create, it provides insights into where you are over-spending or even under-spending. It can also indicate whether you need to make more money! And the 50-30-20 rule is a simple way of assessing what it even means to spend too much or too little.
I hope you found this post helpful! If you enjoyed this post, please consider liking, subscribing, or sharing with others! Interested in related content? Check out my posts on side hustles to boost your income, budgeting worksheets for kids and teens, money saving tips for weddings, savings challenge printables, how to save for any goal, and more in our personal finance section!