The 50-30-20 budget only requires you to separate your expenses into three main categories: your "needs", your "wants", and your "savings/debt reduction". It drastically reduces the amount of time and effort required to track expenses, and allows you to focus on the bigger picture instead.
As such it is a soft introduction to budgeting, planning and following through for strong Innocent Fool and Martyr archetypes.
To use this rule, you need to know your after-tax income. If you earn a fixed salary every month and tax is deducted at source, it is pretty easy : this is the amount you receive in your bank account from your employer. If you are under self-assessment I would take the same tax rate as the previous year (unless you know for sure that it will be different).
After finding out your after-tax income, allocate 50% of that number for your "needs" spending category, 30% for your "wants" category, and the remaining 20% for debt repayments or savings.
Let's assume your after-tax income is 3,000 (EUR, USD or whatever currency) per month. In this case, you would allocate 1,500 for needs, 1,000 for wants, and 500 for savings or debt.
Now that you identified how much you can spend in each category, the question is which expenses go in each category. You have some freedom to select what fits into one category or another, but here are some general guidelines I suggest.
Needs are expenses you absolutely must keep in your budget no matter what...such as housing, utilities, transportation, health care expenses, and the bare minimum of clothing and supplies for living.
Wants are expenses that you choose to spend your money on, but that you do not need to live your life (even if it hard for you to live without). This category includes expenses like dining out, cable TV, internet, shopping trips, vacations, memberships, subscriptions, gifts etc...
It's easy to fall into the trap of considering many wants as needs. A simple way to determine if something is a need or a want is to ask if you could survive without it. If you could, it's a want, not a need. If you would lose your life if you did not have it, it is a need.
Some archetypes struggle at this stage, especially the Fool.
The "savings / debt repayment"category is, as it says on the tin, an amount you set aside for your rainy days or to pay off debt faster.
The 50-30-20 budgeting rule suits some people better than others. Whether the system is right for you depends on your specific circumstances.
I referred to the concept of archetypes several times and invite you to take a quiz to find out which ones influence you most
If you do not have a strong Warrior archetype, having just three categories to deal can make it easier to focus on what matters most For others, the lack of structure could make it harder to find ways to improve their spending habits unless they are held accountable.
Another issue I sometimes come across with clients using the 50-30-20 method is the breakdown of money allocated to the three categories. Depending on your income, your personal circumstances and location, 50% may or may not not be a large enough percentage to include your needs.
Instead of forcing them to fit in, I slightly bend those "rules" to make it more realistic and reachable.
The most important outcome is to start making conscious decisions and distinguish what is a need and what is a wish, as opposed to strictly adhering to those proportions.
For people with a strong Innocent or Fool who do not like detailed budgeting, the 50-30-20 budgeting is a simple and practical way to keep your personal finance under control. Once you are comfortable with the three major categories to track, you can move to something more elaborate and customised
Unfortunately, the 50-30-20 rule won't work for everyone because of individual circumstances, such as residing in an area where the cost of living is high. Keep in mind, though, that you can adjust the rule by changing the percentages.
If you find it hard to budget, get in touch and tell me which methods you tried, we are here to help!