A budget tells your money what to do, instead of your money telling you what to do.
Are these all the things that come to mind when you hear about budgeting? If so, you need to rethink those preconceived notions. Budgets actually set you free. A budget is a plan – a plan for your money!
You have a plan for vacation, your kids’ college and other major life events. So, let’s discuss a plan for your money.
In this article, we will look at a budgeting method known as the 50-30-20 Budget Formula. This method is just one variation of several methods that you can use. Perhaps this is one that will fill your needs and put you on the road to winning financially.
The 50-30-20 Budget Formula
This methods starts with your take-home pay. Take-home pay is defined as your gross income less all the required taxes (federal and state income tax withholding, social security and Medicare tax). Once we have that amount, we can begin to divide it up into the related categories – 50% for needs, 30% for wants and 20% for savings.
How it Works
This method of budgeting is often called the bucket method to successful budgeting. It’s a budget formula liked by many because of its simplicity. What is simpler than dividing up your take-home pay into three buckets?
Half Goes to Needs
We can also call this the four walls plus category. Included here in the 50% bucket are the things you cannot live without. The four walls are food, shelter, clothing and transportation. These are the bare minimum necessary to survive. Find more details here: https://thebiweeklyadvisor.com/money-matters-wealth-tip-2-budget-building-the-walls/.
In this method, we add to these essentials in what I have referred to as the “plus.” This includes health insurance and minimum debt payments. Car and life insurance can also be added.
Minimum debt payments are included here because you want to keep the wolves away from your door.
Do not include anything beyond these things in this category. Memberships, eating out, clothing beyond what is needed for work, and any additional debt payments are all excluded.
Nearly a Third Goes to Wants
This perhaps will be many folks’ favorite category. Here is where you budget 30% for eating out, going to the movies and other forms of entertainment. Gym memberships, Netflix, any clothing beyond work clothes, the fancy new smartphones, other electronic gadgets and anything else you think is a need but did not fit our definition.
There may be many less expensive alternatives to satisfy your wants, such as perhaps an older generation cell phone or maybe choosing to exercise at home. How about reading for entertainment?
Depending on your financial goals, this is certainly the category you could pull back on to increase spending in the final category of savings.
A Fifth for Savings
This category perhaps is the most important one and the case could be made that it should be the 30% bucket rather than the 20%, at least until you get your cash-out flow under financial control.
Here we will fund our retirement accounts, create an emergency fund, pay down debt and provide for sinking funds.
Retirement planning is an essential part of financial planning and one should target about 15% of your take-home pay to fund your future. If you do this for 30-plus years, you will have a comfortable retirement.
Paying down debt and eliminating it all together is included here. If you eliminate debt, monies are freed up for other uses to reach your financial goals. What would being debt-free feel like?
An emergency fund of three to six months of expenses is an important component in any financial plan and needs to be in place before any retirement savings or other investing can occur. This is a key element to financial success.
Sinking funds are always a good tool to have in your financial toolbox. What is a sinking fund? Saving for a new car, a down payment on a home, a vacation, a wedding, the kids’ college, to name a few. Basically, anything that may take a little while to accumulate funds to purchase.
Conclusion
I hope this helps you to achieve your financial goals. A budget is essential to any financial plan. A budget tells your money what to do, instead of your money telling you what to do.
If you are having difficulty getting started, here is a 10-step plan you can use: https://thebiweeklyadvisor.com/10-easy-steps-to-creating-a-budget-that-will-put-you-on-the-path-to-financial-independence/.
Good luck and much success in achieving your financial goals! If you want to succeed, have a plan! QCBN
By Steven Calabrese, CPA
Steven Calabrese, CPA, is the CFO of Polara Health. He also is the owner/operator of a website known as thebiweeklyadvisor.com, where topics such as budgeting, investing, paying off debt and goal setting are discussed.
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