by Steven Witter, CFP®

Everyone knows they would be better off with a budget, but almost no one creates or follows one. Why? Most people don’t know where to begin, or worse; don’t want to see where they are actually spending money. But what if it could be made easier and allowed you to spend guilt-free? After all, if you save it all away, you’re not really living and that’s no good either.

I am a fan of the “20/30/50” budget. It’s straightforward and allows you to spend on the things you love, while still keeping your spending in line with your savings. The key is finding what you value and enjoy spending your money on. For example, if you value a nice house, you can spend more on a house, but it might come at a cost of nicer cars or vacations. Let’s look at how this budget is set up and how it can help you plan and stick with it.

The “20” = 20% in Savings:

The first step in the budgeting process is to take 20% of your after-tax income and save it. At least 10% should be going towards your retirement (Roth IRA, 403b or 401k account). If you want to have a rich life in the future, plain and simple, you have to adjust your spending today to pay for it.  The longer you delay and put this lifestyle change into effect, the harder it gets to try and take money from your current expenses due to “lifestyle creep” (aka, make more, spend more).

The savings category is where you save for your future self. Common ways to save here are a standard savings account, Roth IRA, 403b, 401k, Health Savings Account (HSA), 529 College Savings Accounts, Vacation account, Home Improvement account, Wedding account, etc.

The “30” = 30% Debt Repayment:

This category can make the biggest difference in your budget. If your debt is too high, it robs you from saving for your future self or spending and having a nice lifestyle right now. Hopefully you do not have any credit card debt, but if you do, eliminating it early should be your top priority as it can have devastating interest rates – sometimes well over 20% – which can be very difficult to dig out from under.

This is where you pay for your past spending decisions. Common expenses in this category are auto loans or leases, student loans, mortgages or rent, etc.

The “50” = 50% Spending:

This is the category where all the rest of your spending goes. Since most of us put everything on a credit card each month (hopefully you’re earning rewards points through a credit card program, but paying it off in full each month), you should look at your average credit card bill to see where the money is going.  Do not forget to add in other expenses paid directly from your checking account and non-monthly bills such as utilities, life insurance, or car insurance.  The fewer costs you have in this category, the more progress you’ll make paying down debt and saving for your future self.

This is where you pay for your current spending decisions. Common expenses in this category are your credit card balances, utilities, health insurance, gym, cell phone bills, auto insurance, life insurance, etc.

The “20/30/50” budget is designed to set you up for future success by saving for retirement, paying off debt, and enforcing good life-long budgeting habits. More importantly, it’s set up to help you spend money on what you value. When Rebecca and I sat down and did our budget we settled at 33% (Savings) /24% (Debt Repayment) /43% (Spending) – again, cutting down our spending now so we can enjoy a long life of fun later. I would love to know what your numbers are!

Interested in learning more about the “20/30/50” budget? Click HERE to receive our budget template!

Did you know that spending decreased by 15.7% on average for those who downloaded and used a financial app.*  This is why we offer our Financial Life Organizer to everyone. The Financial Life Organizer allows you to track your spending, budgets, investments, net worth, and progress towards your goals all in one place.

I use the budgeting feature for common categories of my spending such as restaurants, fast food, gas, TV, etc. This helps me notice what I am spending money on and if I spent a lot or a little in each category for the month. For example, I would like to spend no more than $200 a month on restaurants so when I see that I have only spent $100 with one week left in the month I know that it is ok to go out to a nice restaurant. Conversely, if I see that I have already spent $250 then I should probably wait until next month.

Just like watching what you eat is the key to a healthy diet, maintaining a budget is key to a happy and healthy financial life. It gives you the freedom to spend today knowing that you are not jeopardizing your future. The budgeting spreadsheet and Financial Life Organizer are great tools to help guide you through the process.