If you’re wondering how to simplify your budget, you’re in good company.
Complexity keeps many of us financially stuck. How many times have you decided to make a proactive financial move, only to have your progress stalled because what you were trying to do got too complicated?
I know how frequently that happens. In my work as a financial advisor for the past 20+ years, I’ve been helping people find and implement budgets that work for them. I’m honored to be named to Investopedia’s list of the top 100 financial advisors many years running.
When over 60% of Americans aren’t budgeting, that tells me there’s a big problem and that people need help. My goal is to give you a straightforward framework for budgeting that you can not only easily follow along with but also put into place immediately.
Here’s what we’ll cover:
- What a budget is
- The 50/30/20 budget guide
- Getting started
- Needs
- Wants
- Financial priorities
- Additional resources
Let’s get started.
What a budget is
As simply as I can put it, a budget is a plan for your money.
It helps us to prioritize how we’re using one of our most important resources (money). It tells us if we’re on track to reach our most important goals and objectives, or if we’re behind. A budget can also tell us if we can afford to do things, like go on vacation or buy Bitcoin.
Personally, budgeting used to feel restrictive. Over time, it helped me to become organized, get out of debt, and now it empowers me. I’m hopeful it will do the same for you.
The 50/30/20 budget guide
There are a lot of ways to budget, none of them are right or wrong. The best budget for you is the one that you follow.
To help simplify your budget, I want to teach you the 50/30/20 budget guide. It’s helped me and my clients get started with budgeting for many years.
The 50 stands for needs, the 30 for wants, and the 20 for financial priorities. Let’s talk about how it works.
Getting started
To start, you need to determine your after-tax income. This is almost as easy as simply totalling up the money that hits your checking account every month. Once you know that number, we add any employee benefit deductions, like health insurance premiums, 401(k) contributions, and FSA/HSA contributions.
That’s the number we’re going to work from. For the sake of simplicity, let’s assume that number is $1,000.
Needs
Needs are things you absolutely can’t live without. Here are the most common items:
- Housing
- Food
- Transportation
- Medicine
- Insurance
- Child care so you can work
- Clothing
- Minimum monthly loan amounts, as well debt repayments
Based on our $1,000 monthly income, 50% ($500) should be allocated to your needs. Write down all your needs to determine if you’re currently within the parameters.
Wants
Wants are things that accentuate life. Here are the most common items:
- Subscriptions
- Travel and vacations
- Food away from home (Eating out and happy hours)
- Entertainment
- Designer clothing
- Designer accessories
- Fancy jewelry
There will be a fair amount of crossover between wants and needs. Clothing is a need, but designer clothing is a want. For example, the cost of a middle of the road business suit may be $200 (Need), but you may purchase one for $300 (The additional $100 would be a Want).
Based on our $1,000 example, 30% ($300) should be allocated to your wants. Write down all your wants to determine if you’re currently within the parameters.
Financial priorities
The final 20% of your budget should be allocated to your financial priorities. The most common items being:
- Debt repayments (Contributions above the minimum required payment)
- Saving and investing
No one ever got to retirement age and thought, “I wish I hadn’t saved all this money.” While there’s no limit to how much you can save and invest, 20% is the number you should be working to get to.
Based on our $1,000 example, 20% ($200) should be allocated to your financial priorities. Write down all of yours to determine if you’re currently within the parameters.
What blows up our budgets?
We commonly overspend on our housing, transportation, and food away from home (eating out). If your current spending isn’t aligned with 50/30/20, start by looking at those areas.
What to do if you’re over budget
Fundamentally, you’ve got two options; you can earn more, or live on less. Are there opportunities for you to get promoted or earn a new certification which will allow you to earn more? Is there a side hustle you can start that will allow you to earn more?
Can you find ways to cut or reduce expenses? Perhaps some combination of both?
Additional resources
As you’re getting started with budgeting, I encourage you to review your cash flow and budget at least once a month. When you get the hang of it, you can switch to quarterly reviews.
There are a lot of great tools out there as well. If you’d like an app, try Mint. People also really like YNAB. Tiller Money has great customizable spreadsheets.
Get excited, you’re on your way! Please be patient and give yourself grace when you slip up. It’s more important to get back on track with your budgeting than to be hard on yourself.
You’re someone who can be financially successful. Finding a budget that works is an important step in that process.
If you’re ready to take control of your financial life, check out our DIY Financial Plan course.
We’ve got three free courses as well: Our Goals Course, Values Course, and our Get Out of Debt course.
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