Everybody knows that a budget is the key to financial success, but budgeting can be hard if you don’t know how much money you should be spending on expenses. Balancing a budget doesn’t come intuitively to many people, so it can be a struggle to know if you’re using your money wisely.
Luckily, the percentage budget is here to help. It sets spending targets as percentages of your total income, so you know how to allocate your money responsibly.
But what are these percentages, and how do they work? This guide uncovers the ins and outs of the original percentage budget before explaining three possible alternatives. Keep scrolling to learn more.
The Classic Breakdown: 50-30-20
The original percentage budget breaks your monthly after-tax income into three categories:
- 50% for your needs
- 30% for your wants
- 20% for savings and debt repayment
So, what does this mean in practice?
Needs represent the essential expenses that allow you to run your household. They’re bills and payments you must make to live and work, and they should take half of your net income for the month.
These expenses tend to include things like your housing costs, food, transportation, insurance, and the minimum payments on installment loans, credit cards, and line of credit loans.
Wants represent your discretionary spending. In other words, they’re the frills that pad out your budget to make your life more comfortable or fun.
Since you can live without them, they take a smaller portion of your monthly take-home pay. They may include entertainment, travel, and fun shopping.
The remaining 20 percent of your paycheck should go towards preparing for the future. Here, your savings play a dual role.
1. Financial Cushions
You’ll want to squirrel away cash for emergencies, big expenses, and retirement. These small monthly contributions grow over the years, making it easier to take on costly bills and purchases that crop up.
2. Debt Repayment
If you have open installment loans or lines of credit, consider putting some of this cash towards extra payments. These payments go above and beyond the scheduled, minimum payments outlined in your loan contracts.
Read these contracts carefully before you cut a check. That’s according to the installment loan experts at MoneyKey, a financial institution that offers installment loans in Delaware.
While they encourage any borrower to make additional payments against their MoneyKey Delaware installment loan, not all lenders will do the same for their Delaware installment loans. Some online direct lenders will charge you a fee for making any payment outside your usual schedule, even if it’s an extra payment.
If your contract shows that you’re in the clear, additional payments may help you pay less interest and free up your credit limit. Otherwise, you’ll have to weigh up the cost-benefits of paying a fine for reducing your debt early.
What if Your Expenses Don’t Match These Breakdowns?
Don’t panic! It’s alright if you can’t squish all your needs into 50 percent of your monthly income. A lot has changed since the 50-30-20 Rule was first popularized in 2005. From rising costs of living to pandemic-induced unemployment, today’s current financial climate may mean your finances can’t fit the original rubric.
Luckily, the 50-30-20 method is just a template that you can tweak to fit your unique circumstances. Try these alternatives if you’re having trouble sticking to the original breakdown.
Alternative #1: 60-20-20
The 60-20-20 budget shakes up the percentage breaks down to sock away more money for your needs. This is ideal if you deal with a higher cost of living or have a lot of installment loans and credit card debt.
Under this method, your needs should now take up 60 percent of your take-home pay to cover your bills.
Percentages always have to add up to 100, so you’ll have to adjust how you distribute the rest of your income.
Since savings are important to your future, financial advisors don’t recommend stealing cash from here. Instead, try cutting your wants until they only take up 20 percent.
Alternative #2: 70-20-10
If your needs still exceed the above breakdown, this next step is another option. It reserves 70 percent of your take-home pay for monthly essentials.
This extra 10 percent must come from somewhere, and your wants wind up taking the hit. You’ll only have 10 percent of your paycheck for the fun stuff, preserving the usual 20 percent for your savings.
Alternative #3: 80-20
Last but not least, the 80-20 Rule is the most flexible version of the percentage budget. It splits your income into two categories:
1. Non-savings, taking up 80 percent of your income
2. Savings, using up the usual 20 percent
Non-savings include everything that isn’t savings, so it covers a mixture of your needs and wants. This option is ideal if you have unique costs that don’t fit the other breakdowns. It’s also an option if you’re juggling a low income, as your housing costs will take up a proportionately larger piece of the pie.
However, the 80-20 method is a little trickier than the other alternatives. You may not like how much freedom you have if you prefer having clear boundaries.
Which Breakdown Sounds Like the Right Fit?
Don’t be afraid to try more than one. Budgeting can be like shopping for shoes. You’ll have to try them on to find the best fit.
In any case, one thing all these methods have in common is savings. They each prioritize 20 percent of your income to put toward future expenses and debt repayment. This savings-savvy focus creates a financial safety net for tomorrow’s goals and emergencies.
With a safety net in place, you may not have to take out more installment loans or lines of credit. Instead, you’ll have the financial freedom to handle whatever comes on your own. And better yet, you’ll have some money set aside to have fun, too.