Creating a budget can help you understand where your money goes each month, which is a good first step towards financial wellness. It may take some trial and error to determine which kind of budget will be most beneficial to you. There are many approaches to budgeting; however the 50/30/20 budget is one of the most popular methods.
The 50/30/20 method is popular due to its easy-to-follow approach. You simply put all your expenses into three buckets. Here are what these different percentage buckets cover:
Below is a breakdown of which expenses fall into each category.
50% for needs
These are the necessities and the expenses you can’t avoid such as:
Basic groceries are quite often hard to define depending on your lifestyle. Be honest with yourself about what are genuine food essentials as this is an area where you can cut your spending significantly. Also consider reviewing your internet and cell phone usage and bills to find ways to further reduce your expenses.
30% for wants
These are the extra expenses that aren’t essential to living and working. It is often difficult to distinguish from needs. The key is to be honest with yourself and reassess whether the expenses are needs and wants. Wants often include fun activities and may include:
In some cases, you may choose to categorize a gym membership as part of a health care cost. The categorization of your expenses is really up to your discretion and the 50/30/20 method is a guideline to help you gain a clearer picture of where you stand today.
20% for savings
Set aside this portion of your income for savings, financial goals and emergency fund. Depending on your circumstances, you should utilize this portion of your budget to:
When making payments to reduce debts consider the Avalanche payoff method. With the avalanche payoff strategy, you focus on repaying debts based on their interest rates. This method prioritizes interest rates and paying off debt with the highest interest rate first. You move on to the next highest interest rate debt after the first is paid off. This helps you pay less interest over time.
Neontra and the 50/30/20
Almost everyone can benefit from the core idea of the 50/30/20 guideline. However, the precise breakdown of your spending may need to be adjusted based on your income and expenses. The 50/30/20 method is a simple, practical rule of thumb for individuals who struggle to budget. One of the challenges of implementing the 50/30/20 rule is determining how much of your money is going into each category. The good news is that Neontra does this work for you.
At Neontra, we auto-categorize all your transactions from every bank account and credit card by the following:
This effectively creates a personalized auto-budget where you see all your expenses in four simple categories to help you plan for a more secure and brighter future.
In our expense explorer, you can analyze your cash flow cumulatively over time, per period, or by type (Essential / Non-essential / Savings contributions/ Debt repayments). Expense explorer also has visualizations making it easy to follow every dollar, track all your expenses and build a 50/30/20 budget.
Other Budgeting Methods
If the 50/30/20 budgeting method does not suit your needs. There are many other budgeting methods for you to consider including:
Regardless of what budgeting method you choose, creating and sticking to a budget is the best way to ensure you’re living within your means and achieve your financial goals.