Budgeting is a skill that helps you make smart decisions with your money. It ensures that you’re spending less than you earn, it prepares you for life’s curveballs, and it funds your goals and your dreams. Unfortunately, budgeting is often seen as restrictive and overwhelming. Financial priorities are deeply personal, so it can be challenging to find the right combination of strategies and tools that work for you.
If you’re new to budgeting or if you don’t feel confident with your current mix of budgeting tools, give proportional budgeting a try. A proportional budget divides your income into categories by percentage. It’s a simple concept to apply, it pairs well with the spreadsheets and/or apps you may already be using, and it can be easily tailored to suit your specific needs. Most importantly, it will make you think about your expenses in a completely new light.
Step 1: Determine Your Limits
Your first step is to calculate how much money your 50/30/20 percentages should represent for your particular financial situation.
You might ask- What does 50/30/20 mean?
- Spend 50% of your income on needs
- 30% on wants
- and 20% on savings
Take your monthly net income (that’s your take-home pay after taxes and deductions) and multiply it by 50%, 30% and 20% to determine your spending limits.
For example, if you net income in $3,000 a month you would aim to spend:
- $1,500 a month on needs
- $900 a month on wants
- $600 a month on savings
Step 2: Track Your Spending
In order to measure your budgeting progress, you need to know where you’re at right now. Track your spending for at least two (2) months. Capture your transactions however you like, but keep in mind that the more accurate you are, the more effective your 50/30/20 budget will be.
- Have your account/credit card statements handy to easily reference your purchase history
- Find a way to document cash transactions that are not captured on your statements- a scrap of paper in your wallet or a notes on your phone will do the trick
- Make sure your annual expenses are represented- list as many of your yearly expenses as you can and divide them by 12 to calculate how much they cost you every month, for example:
- Annual subscriptions renewals
- Annual services and membership fees
- Parking permits
- Property taxes
Step 3: Sort Your Expenses
Once you have a snapshot of your monthly spending, sort each of your expenses from the previous month into one of three (3) categories: Needs, Wants and Savings.
Needs are your absolute essentials. Skipping these expenses can lead to extreme hardship, job loss, illness or legal trouble.
Wants are all your non-essential purchases. Some of these non-essentials are easy to identify but others are trickier to spot because they can ride the line between needs and wants.
Savings are any expenses that go toward debt repayment (beyond minimum payments) or savings goals.
|Eggs, Flour, Veggies||Snacks|
|Basic brand toilet paper/toothpaste/shampoo||Premium brand toilet paper/toothpaste/shampoos|
|Basic cell phone with call plan||Fancy cell phone with data plan (set 50% of your plan towards Wants and 50% towards Needs)|
|Basic rent||Gorgeous apartment in a prime location (set 50% of your payment towards Wants and 50% towards Needs)|
|Minimum loan payments||Beyond minimum loan payments|
|Emergency fund savings|
Step 4: Compare Your Percentages To 50/30/20
Add up your spending totals in each category and calculate what percentage of your income they represent. If your totals for needs, wants and savings already align to 50%, 30% and 20% respectively, then congratulations! Realistically, your totals will be different and that’s OK, because this will indicate where you need to make adjustments.
Step 5: Make Adjustments
Every month, try to get closer and closer to the 50/30/20 limits you determined in Step 1. If you find yourself consistently overspending in a certain category, you have a few options available to you:
- Find cheaper options for regular expenses– see if there are expenses in your budget that you could reduce by switching service providers or going from brand name to generic
- Sacrifice something from another category– this is easier to do when you understand exactly how it affects your financial goals; pack a lunch instead of dining out feels more doable when you know that it will ultimately result in more spending money for your vacation next summer
- Increase your income– if you’re unwilling or unable to compromise on your spending, then you need to look for ways to make some extra money in order to maintain the 50/30/20 budget
After a few months, the 50/30/20 budget will feel natural to you: you’ll know which purchases are in line with your budget and which ones are not. You’ll have a better understanding of- and therefore more control over- your spending, and as a bonus, you’ll begin to notice that you’re closer to your savings goals than ever before.
Step 6: Keep At It
Some months are easier to budget than others. Don’t get discouraged if an unexpected expense or a moment of weakness throws you off your budgeting game. Keep tracking your spending and chasing that balance of 50/30/20.
If this budget isn’t meeting your specific needs, try tweaking the percentages to better match your financial goals. A 30/10/60 budget skimps on wants, but will help you pay off a debt quickly. A 60/20/20 might be more suitable if you live in a city with high housing costs.
Whether you stick with the 50/30/20 proportional budget or transition to another system, 50/30/20 will shape your understanding of and build your confidence with budgeting.