50-30-20 Budgeting (DRS #3)

Welcome to the third post in my Debt Repayment Series, discussing 50-30-20 budgeting! In case you missed it, I’ve previously posted about calculating a debt payoff date and why having a repayment plan is important.
Budgeting and finance tips are all over the internet. One prevalent theme I’ve seen is the 50-30-20 rule (typically listed as the 50-20-30 but I like them to be in order).

What is 50-30-20 Budgeting?

This budgeting rule was originally presented by Elizabeth Warren and her daughter Amelia Warren Tyagi in their book All Your Worth: The Ultimate Lifetime Money Plan. The original rule is as follows:

  • Limit to 50% of your monthly spending to Needs such as food, shelter, warmth, and minimum payments on debts.
  • Limit to 30% of your monthly spending to Wants, defined as something that you can give up with only minor inconvenience.
  • Focus at least 20% on Debts & Repayments, including any extra payments on debts and your established savings plan.

This rule was originally presented as above but has been tweaked several times since by various others. Regardless, it is more of a budgeting guideline or rough estimate of how your budget should break down after taxes. The numbers in the title are percentages and refer to specific categories within your budget.
I have seen several different ways to break down and/or label the categories. Regardless, the percentage range remains the same.
I use the following labels:

  • 50: Needs
  • 30: Wants
  • 20: Priorities

For the visual folks out there, or the psychology nerds, I like to apply this concept to Maslow’s Hierarchy of Needs. It helps me wrap my head around the categories with better understanding. Plus, I’m a psychology nerd.
50-30-20 Budgeting | Debt Repayment Series from Furry Finches

Needs: Limit to 50%

Maslow’s hierarchy clearly depicts basic needs in the diagram, where the 50% rule would be applied. This area of need clearly lists the bulk of what applies: water, shelter, food, safety. Needs are basically required monthly payments to keep you housed, warm, safe, and fed, but may also include insurance, transportation costs, medications, and childcare

Wants: Limit to 30%

Wants  Anything that falls into entertainment, services, or daily practices. This includes such things as This category can also be referred to as the lifestyle or flexible spending category. The general rule here is this is where you spend your money to create your lifestyle. This category has the most flexibility and can be the most adjusted.
The psychological needs, or wants, are the variable expenses you pay monthly to make your life more enjoyable. This can include are dining out, cell phone plans, gym memberships, Netflix, Hulu, subscriptions, entertainment, massages, manicures, pedicures, movies, (entertainment, socialization, hobbies, status symbols, etc.).
Think of it this way: if you do it with friends, it’s in this category.

Priorities: At least 20%

Finally, self-fulfillment needs represent your financial priorities. This is where you focus to achieve your full potential, such as being debt-free or becoming a millionaire. The purpose of this category will shift over time as you accomplish your established goals.
Priorities include your savings plan and paying your financial obligations, such as student loans, car loans, IRA contributions, etc. I personally include all debt payments in this category because it is my primary priority at this time and I hate the idea of splitting my minimum payment and extra payments, particularly because they are the same debt and go to the same place.

Obviously this is meant to be a guideline to help you begin categories your expenses and develop a budgeting plan. The specific percentages can be adjusted, as the guideline only specifies limiting needs to 50% and wants to 30%.
The fluid guideline allows you to shift your percentages easily to better reflect your focuses. For example, here is what my pyramid looks like:
50-30-20 Budgeting | Debt Repayment Series from Furry Finches
As you can see, my priority category is a significant portion of my monthly expenses, coming in at 56% of my monthly budget. I consider this the most important category because I am actively pursuing becoming debt-free. As I mentioned before, I lump all loan payments in this category.
50-30-20 Budgeting | Debt Repayment Series from Furry Finches
I have also included what my spending categories look like if I separate the minimum and extra payments (Priorities drops from 56% to 22%). My student loan minimum payment accounts for 34% of my monthly budget.
My needs include transportation costs, insurance, and my student loan minimum payment. This is because my husband and I have separate finances and he pays the mortgage.

Brief Summary

  • 50-30-20 Budgeting is proportionate budgeting based on percentages of your monthly budget.
  • Keep your needs under 50%
  • Keep your wants under 30%
  • Make sure your savings and repayments are at 20% or above
  • The pretty pyramid is a tool to help you better understand how to categorize your spending
  • The less attractive pyramids are two different samples of my budget
  • It’s more of a guideline so make it your own
  • Be awesome!
  • Save money!

50-30-20 Budgeting | Debt Repayment Series from Furry Finches
What are your financial priorities?

Check out the next post, Best Way to Apply Extra Payments.

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