How to create a 50/30/20 Budget

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A question I’m often asked is:

“How do you create a budget that works?”

Here is the secret though – no one budget style suits everyone.

In fact, your budget must be completely aligned to your financial and life goals and that is very specific and unique to you and your lifestyle.

However, I wanted to share with you a series of posts that will be dedicated to creating a budget and a few suggestions that you could use for your own.

First of all – Be sure on what your financial ultimate goal is.

Is it to be mortgage free in 5 years?

Is it to be completely financial free (living off the income of your properties/investments etc) within 20 years?

Just want to retire before the age of 65?

Whatever your goal is – Let that be the starting point for any budget you create.

// What is the 50-30-20 Budgeting System?

This type of budgeting looks at your total spend as a percentage of your budget for certain categories of spending.

For example, the “50” in the title means part of your budget is 50% of the overall total.

In our case, we will take this our budget total to be our POST-TAX amount.

Fancy giving this budget style a go?

Here are the breakdown of those steps for you to implement in your own household.

// Start by categorizing your budget fully

Start by taking your POST-TAX amount of money you bring into your household each month.

That is your 100% total.

For the past month as an example, label each of your spending that comes out your account as either “Needs“, you need to spend that money for a roof over your head and to keep you alive; “Wants“, things that bring you joy like Sky TV/Gym memberships/Holidays; and “Debt Repayments & Future Planning“.

Include any mortgage and rent payments into your “Needs” category though and move any other debts like credit cards/cars into your Debt repayment amount.

Next work out how much of your total monthly income to your house is spent on each of those areas, and then work out the current percentage for each type.

// Your total “Needs” of your budget should be 50% of your total take home pay

The Goal for the 50-30-20 budget strategy is that no more than 50% of your take home income is for your “Needs” to keep you alive and well.

If you already fall into that category, well done – you are half way there to getting this budget to work for you.

If you aren’t there yet, this is where you look into what bills you could potentially reduce or remove altogether to get you there.

// 30% of your budget is for your “Wants”

So that you are able to enjoy your hard earned money, and create the life of your dreams with holidays and luxuries – this budget allows for up to 30% of your income to be for “Wants”.

This could be having a gym membership, buying lunch every day at work and so on.

Alternatively you could look at it as no more than 80% of your take home pay should be for living life.

// Remaining 20% of your budget is for Debt and Future planning

With this style, the final left over 20% of your budget is for paying off any debts (credit card, home, car loans etc) and then saving for your future.

I’ve taken about debt management before on my blog, and you can find me describe the main method of debt payments on this video below:

Make sure you are meeting the minimum payment on every single debt you have, then use the remaining outstanding how you wish in whatever method works best for you

With this 20% you would also be ideally looking to generate more money in the future from it, and that is through pension contributions (for your retirement) and investments.

The POWER of Compound Interest and making your money create more money for you can never be underestimated!

If you don’t already set some of your money aside each month to allow it to generate more money for your future – you are missing out on the greatest money trick since the world began.

In the UK, the government have announced plans to set the minimum Pension payment to 4% if you work for an employee, although you can still choose to opt out, but the obvious benefit is the more you take from your current pay cheque – the bigger your future ongoing pay cheque will be once you retire or even allow you to retire early.

With 15% saved towards your retirement, you could easily be looking at retiring some 20-25 years after you first of all start saving towards it.

Unsure of how to start investing? Check out my post here.

Increase that percentage put away specifically for investing/pensions/your future, and the time taken for you to reach your financial freedom ultimate goal (the exact amount that keeps generating enough interest for you to live off indefinitely) will continue to drop.

Even better – if you can REDUCE your living expenses as well as save as much as you can without hurting your current life – you will get there even quicker!

// My opinion and thoughts on the 50/30/20 Budget

This is definitely a very simplified method of budgeting that works for a lot of people as it reminds you to save and work towards your future but also means you are not overspending each month on items that won’t bring long term value to your life.

By setting a goal for 20% of your income to be for debt repayment and future planning, you are setting yourself up nicely to retire early or at least very wealthy if you have time on your side.

Overall though, I do like the simple nature of this budget which allows you the freedom to spend on life luxuries knowing that you have invested and used your money wisely each month.