The Ultimate 50/20/30 Savings Plan Guide
Have you ever heard of the 50/20/30 budget? I’d not heard of it until very recently, and I have to admit at first I was confused. Now that I’ve read a bit more about it, I think it’s a fascinating concept; one that perhaps we should teach our kids as they are growing up to help them get a bit more practical in terms of their financial future. While I’m at it, what if we take it upon ourselves to make all math problems financially related to further remind kids that their financial future is serious?
But I digress, we’re talking about this kind of awesome new budget that I’m talking about. I’ve never seen anything like it, and I’m a little bit impressed by it. it seems that it’s been designed as a formula to help you stay on track, make smart financial decisions and to keep your life in order. The purpose is simple. You put 50 percent of your income to your essentials. By essentials, we clearly mean that you need to pay your mortgage and insurance and your grocery bill among others.
The next part is the 20 percent part. This is for your future. Basically, you take 20 percent of your income and you put it away into retirement account, personal savings account, emergency fund account and anything that will help you with the future. The last part is the 30 percent area. This is for your lifestyle. Let’s face it; life should not be a series of getting up, working, coming home, going to bed, getting up, working, coming home, going to bed. It’s meant to be fun, so we like the idea that this budget has you handling your necessities as well as your future and your current needs and wants.
I love the idea, I really do; but I think it leads to a few questions because we all know there has to be a gray area everywhere, right? What is a necessity and what is a lifestyle expense? For example, you might have a long list of monthly expenses.
You have to really make yourself aware of what is actually a necessity and what is not. For example, you have to have insurance and a place to live, and you probably need a phone for emergencies at least. However, you can get through life without ever having satellite television, so we have to move that one to lifestyle.
You see, the purpose of this list is to help you understand where your money goes, how to get it there and how to live with financial responsibility. It’s also broken down into order of importance so that you know that your wants are at the bottom of this list. If you have a financial issue in life, you know that it’s time for you to get rid of some of the things on the lifestyle list and make room for more freedom elsewhere.
What we love about this list, too, is that you can further break it down into anything you want. Let’s to go with your future as an example. According to this list, you’re spending 20% of your income on your future. However, you can break that down as you see fit. For example, would you like to spend 10% of that 20 on retirement and the other 10 on savings? Would you like to do 10% toward retirement and 7% to your savings and 3% to an emergency fund each month? Let’s say your monthly income is $10,000. You’re putting $5,000 of that to your essentials. You’re putting $2,000 of that toward your future every single month. You could put $1,0000 toward your retirement and the other $1,000 could go $700 to savings and $300 to an emergency fund.
What happens if you don’t need to spend half of your income on your essentials? For example, you have a $10,000 per month income, but you only have $3,000 in monthly expenses that are a must, such as your mortgage, car payment and your groceries. You can do whatever you see fit what that additional money not needed for your essentials.
We like the idea of saving it, but you can do whatever you want. Perhaps you’d like to put it toward paying off your mortgage that much faster. Perhaps you’d like to split it in half and put half away in your savings account and the other half into your lifestyle account so you can travel more, or shop more or just go out a little more to have a good time with your friends.
We love this budget because it’s a good budget, but it’s also one that allows you to make some good decisions and to really get your life in order without sacrificing anything.
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