When researching personal finance and how to manage your money the first step is always to create a budget. In many cases, you are not shown exactly how to it.
That is not the case today…
In this post, you will get step by step instructions detailing how to create a budget. You can also download our 50/30/20 Budget Printable worksheet that will help create your budget using the steps in this 2019 guide.
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How to Create a 50/30/20 Budget
There are many different methodologies that can be used to create your budget. In this guide
What is a 50/30/20 Budget?
The 50/30/20 rule for spending and saving was created by Elizabeth Warren. She co-authored a personal finance book with her daughter, Amelia Warren Tyagi.
Her book was titled: All Your Worth: The Ultimate Lifetime Money Plan.
The 50/30/20 budget method is a simple method of creating a budget which focuses on three main categories.
Needs, Wants, and Savings
Your after-tax income is divided into these three categories based on certain percentages.
NEEDS = 50%
WANTS = 30%
SAVINGS = 20%
At this point it is clear to see how the 50/30/20 Budget Method got its name.
The 50/30/20 budget method is best suited for those who want a simple and flexible way of maintaining their budget. The amounts you spend on items in each category can change from month to month.
You only need to ensure that you remain with the 50%, 30%, and 20% spending limits of each category. This will ensure that you are always moving toward
Step 1: Decide How You will Track Your Budget
Budget spreadsheets are great for those who are comfortable working on a desktop computer, laptop, or tablet. They allow you to track your budget items electronically.
Most budget spreadsheets will also complete calculations for you.
Download your copy of our 50/30/20 Excel Budget Spreadsheet and complete it as you follow along with the rest of the guide.
Budget printables are designed for those who like to put pen to paper. They allow you to write down your budget and track things manually.
Budget printable are not fancy but they are great if you like to keep binders or printed copies of your important paperwork.
Download your copy of our 50/30/20 Budget Worksheet Printable and complete it as you follow along with the rest of the guide
Budget apps are another method you can use to track your 50/30/20 budget. They are great if you are the busy on the go type. You can track your budget right from your smartphone no matter where you are.
Here are a few free budget apps that support the 50/30/20 budget method.
For the creative types out there the Bullet Journal is the perfect option. Using a bullet journal will give you the freedom to design your very own budget tracking spreads.
Step 2: Calculate Your Monthly Income
In this step, you are going to calculate how much money you have to spend each month. To calculate this value you are going to use your after-tax income.
Write down the after-tax value of your income from all sources. This will include income from your job(s), your spouse’s income, and income from side hustles.
Once you know your total income. Calculate 50% of your total income and write that value down as your Needs Total.
Needs = 0.5 * after-tax income
Next, calculate 30% of your total income and write that value down as your Wants Total.
Wants = 0.3 * after-tax income
Finally, calculate 20% of your total income and write that value down as your Savings Total.
Savings = 0.2 * after-tax income
You now know the amount of money you have to spend in each one of your 50/30/20 Budget Categories.
Step 3: Calculate
Monthly Expenses in Each Category
It’s now time to see where you are spending your money.
In this step, you will write down all of your monthly expenses in each 50/30/20 budget category. If you are using our 50/30/20 budget spreadsheet or 50/30/20 budget worksheet printable, common expense items are listed for you.
The expenses in your Needs category are those expenses that are required for you to live. This includes your rent/mortgage, utilities, and insurance. only enter expenses in this category if they are required living expenses.
You might be tempted but your hair and nail spending can’t be added here. 🙁
Write down the fixed monthly amount you spend on each of your needs and sum them up to get a total.
This value should be less than or equal to the “Needs Total” you calculated in Step 2. Don’t worry if it is not when you first create your budget. There is a step for adjustments later.
The expenses in your Wants category are those that are nice to haves. This includes your Netflix subscription, clothes, or dining out with friends.
Using your preferred budget tracking method, write down or enter your expenses that belong in the Savings category. This value should be less than or equal to the “Wants Total” you calculated in Step 2.
Again, don’t worry if it is not when you first create your budget. There is a step for adjustments later.
It is best to allocation items to your Needs and Savings categories first. This will allow you to adjust your “Wants” to meet your financial goals.
Not to be a buzz kill but you must remember you can’t have everything you want. Keep in mind that things like vacations go into this category as well.
You may want to sacrifice a few restaurant visits in order to save for that girls trip to Cancun or the annual guys fishing trip.
Saving money is an important aspect of your financial health. Your 50/30/20 Budget is designed to ensure that you have ample savings and eliminate debt.
The expenses in your Savings category are those related to saving money for your future and repaying debts. As we calculated above, 20% of your after-tax income will be dedicated to savings.
Using your preferred budget tracking method, write down or enter your expenses that belong in the Savings category. This value should be less than or equal to the “Savings Total” you calculated in Step 2.
And by now you know the drill… you can adjust this later.
Step 4: Set Financial Goals
The very fact that you are reading this post means that you probably have some financial goal that you want to meet. You might be saving for a
In this step, it’s time to start setting your financial goals. When just getting started there are a few standard financial goals that you should start with. These include having an emergency fund, paying off debt, and saving for your retirement.
An emergency fund is money that you set aside for unexpected expenses. Creating an emergency fund should be one of your first financial goals. It will ensure that you are able to survive financially when the unexpected happens.
It is recommended that you start with an initial emergency fund goal of $1000. Once you reach $1000 in your emergency fund you can then work towards reaching a balance of 3 to 6 months of your monthly salary.
This amount will ensure that you have an ample amount of money to survive emergencies such as a job loss or injury that will hinder you from working.
Paying off high-interest debt such as credit card bills should be one of your top financial goals. The interest you are paying on high-interest debt is money that you could be spending elsewhere.
Write down your current debts and determine which ones you should start paying off first. Pay close attention to interest rates as they will help you determine which debt to attack first.
Once you’ve got your emergency fund set up and you are effectively paying off your debt you can focus on your retirement.
One of the easiest ways to save for your retirement is to set up an Individual Retirement Account or IRA. An IRA is a type of investment account with tax benefits that can help you save for retirement.
Step 7: Monitor Your Budget
At this point, your 50/30/20 Budget should be all set up. It’s now time to start monitoring your budget using the tracking method that you chose in Step 1.
Monitor your budget on a weekly basis to ensure that you are within your spending limits of your Needs, Wants, and Savings categories.
You can also add in our Christmas Budget Tracker to make sure you stick to your financial goals during the holidays. It is designed especially for those using the 50/30/20 Budget method.
Step 8: Make Adjustments
Your budget is a work in progress. You will not get it right on your first try. As a mentioned earlier there is a step for making adjustments.
The longer you monitor your budget the better you will get at identifying adjustments that need to be made and making good financial decisions. It may take you a few tries to get each of your budget categories in a working state.
Also keep in mind that the 50/30/20 budget methods allows you some flexibility in each category. The individual items in each category can change from month to month. Your goal is to ensure that you stay within the 50/30/20 boundaries.
Stick to it and don’t make the mistake of giving up too soon.
Leave a comment and share your experiences with the 50/30/20 Budget method.
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