Budgets can be hard. Tracking all of your spending, categorizing your spending, and trying to stick to it can seem complicated and maybe even overwhelming. Sorting out where you want to put your money and where it’s going can be a lot of work, especially if you’re tackling a budget for the first time.
You wouldn’t be alone, the National Foundation for Credit Counseling found that only 42% adults in the United States have a budget in a 2019 survey . That means 58% of adults don’t have a budget. There’s a good chance you might be in that second group.
You might even be in the first group but find the whole budgeting thing a little confusing. There are so many options: software, websites, homebrew spreadsheets, and then there’s all the data you have put into them.
You might struggle with what a budget category is. Do you know what percentage of your income you should allocate? Maybe you have trouble deciding if you can or should buy something because your budget categories don’t have an overarching structure.
Regardless of where you are in the process, tracking your spending might come with benefits, so there’s no time like the present to do some work on your budget or get started.
If you’re just starting out or are a seasoned pro looking for some new steps to better budgeting, there’s one thing that might make your brand new or old budget seem a little more manageable: budget categories. Well, categories and some simplicity.
Here are some tips and ideas that might help you find the right budget categories and maybe get you started on seeing your financial picture in a whole new light for the first time—or a little clearer if you’ve tried some other methods and are looking to level up your budget skills.
Getting Started With the 50/20/30 Rule of Budgeting
The 50/20/30 rule for budgeting was made popular by Sen. Elizabeth Warren in her 2006 book, “All Your Worth: The Ultimate Lifetime Money Plan.” Warren co-wrote the book with her daughter, Amelia Warren Tyagi.
This book, their second, was written to help readers put their “money in balance” by focusing on needs, savings, and wants.
This is where the 50/20/30 rule comes in.
The 50, 20, and 30 are percentages of after-tax income, and they align with needs, wants, and savings (50% aligns with needs, 20% with savings, and 30% with wants).
Basically, a budget would take your income after taxes and direct it toward three large buckets. Under those buckets is where you could put your budget categories once you’ve figured out what they are.
The largest chunk, needs, takes up 50% of your after-tax income with this approach. If you’ve ever heard of Maslow’s hierarchy of needs , the needs are all the stuff at the bottom of the pyramid. If you’ve never heard of Maslow or his pyramid, the things at the bottom are the things you need to survive.
For budgets, housing, food, even your electric bill would all fall into this category. That’s why they take up such a large chunk of your income and form the base of the metaphorical pyramid. These are all the things you can build your budget on.
You could try to think of these as things you actually need to survive—they’re sorta like the air, water, and food of your budget. So, for instance, a fancy dinner out or a cold-pressed juice or a caramel latte are definitely food, but they wouldn’t necessarily go in this category. Groceries would, though.
You have some leeway to decide if something is a need or not within these categories. For instance, a sensible dinner out could go into this bucket. It’s your budget after all, and making it your own might help make it easier to adopt.
Minimum payments on outstanding debts like credit cards, student loans, auto loans, or personal loans would also go into the 50% needs portion.
Under the 50/20/30 rule, it’s suggested that savings take up 20% of your post-tax income. Savings includes things like contributions to a 401(k) or other retirement account or stock investments.
You can also put payments against debt above minimums here. This might seem a little confusing since you might already have some debt payments in the needs bucket. Payments above the minimum would go here because you might save some money on interest by paying down the principal of outstanding debt, hence why it’s considered savings.
Wants are all the things you want in life, but that doesn’t necessarily mean this is spending on extravagances. Warren and Tyagi write in the book , “you don’t splurge on things you can’t afford, but you don’t deny yourself either. This is a sustainable place for a lifetime of financial peace.”
While your wants might be the things that give you some joy, the 50/20/30 might help you think carefully about these expenditures. Could you have an expensive coffee every day? Sure, but this method might help you question whether you really want to—after all you only have 30% to spend and you might want to get some new clothes or a nice meal out.
Once you have a grip on the major buckets, your 50/20/30, you can start thinking about the categories you’ll want in your budget and what could make sense for you as you think about your goals and how to work toward them.
Your needs can be a good place to start since they will take up the largest portion of your income. These can be the foundational things that keep you going every day, so sorting them first can be a good idea.
One of your first needs is probably housing. This might mean rent and utilities if you rent or a mortgage and home upkeep if you’re a homeowner.
The U.S. Census Bureau classifies folks who spend more than 30% of their income on housing as cost-burdened. This is because they’ve been recommending that Americans spend 30% of their income
on housing since the early 1980s.
These percentages can fluctuate based on where you live. If you happen to live in Manhattan, New York, you might pay close to the average rent of average rent of $4,120 .
Hopefully, your income lines up with the increased cost of living or you have some roommates to split the rent in more expensive cities. If you live in a city like Toledo, Ohio, your rent might be closer to the average of $631 .
There’s a good chance housing will take up a lot of the needs bucket. This may not be the case if you’re staying with family for a few years or have roommates.
With over 44 million Americans having student loan debt, you might also have to add this to your needs allocation. If you’re still in school, expenses related to your education would also go here.
Food expenses like groceries would also go in needs (remember, eating out is a want). Medical expenses, transportation, and childcare would go in needs.
To recap, a good start for needs budget categories could be:
• Housing (rent or mortgage)
• Student loans (if you have them)
• Minimum debt payments (credit cards, personal loans)
Saving for Your Goals
A recent survey found that around 40% of Americans would struggle to cover a $400 emergency expense.
Whether you’re in the 59% who would be ok in this situation or the 4% who might need to do some additional budgeting, the 20% savings bucket is probably going to be an important one. One way to get started might be to open a savings account and start putting 20% of your income there.
If you’re one of the roughly half of American households that has access to a retirement account at work, you might be able to automate your savings bucket. You may even be able to add more to your savings if your employer offers matching on those savings.
If you aren’t offered a 401(k) or something similar at work, you can still contribute to savings. You might be able to find a low-fee, or no-fee, individual retirement account (IRA).
There are also easy and low- or no-fee ways to invest in the stock market with exchange-traded funds (ETF), stocks, or bonds.
Again, your payments above minimums on debts like credit cards, personal loans, and student loans also go in the savings bucket because you could end up saving money on the interest those larger balances could accrue over time.
For instance, paying one extra mortgage payment a year on a $150,000 loan with a 4% interest rate on a 30-year repayment schedule could help you pay off the mortgage four years earlier.
Categories you might include in your savings bucket are:
• Savings account
You Can Have Most of What You Want
Your 30% “wants” bucket is for discretionary spending or the fun stuff—within reason. This is where you could put spending on clothing outside of what you need on a day-to-day basis. Dinner and drinks out with work pals, friends, or a partner could also go in the wants bucket.
Going to the movies this weekend? That’s also probably going to go with the wants. Other items you might put in the wants category are things like gym memberships, personal care, and miscellaneous spending.
You might be tempted to make a bunch of budget categories in this bucket. It’s easy to see how dinners, movies, clothing shopping, even coffee would get a category. While some may find that useful, you may also want to think about how simplicity and fewer categories might help your budget.
Once you’re ready, these categories might work as a good starting point for your wants bucket:
• Personal Care
Especially if you’re just starting out, keeping it simple using the 50/20/30 method might be a good approach. You could put dining, movies, and concerts into the entertainment budget category to start. Then, if you find yourself needing more granular data, you could always break out the categories as needed.
Finalizing Your Budget Categories and Getting Started
The simplicity of the 50/20/30 plan might just help you get a clearer picture of your budget and some flexibility that might help make the process a little easier. And with that you might be able to get a handle on where your money is going now and where you want it to go tomorrow as you work toward your goals.
In addition to all that, the 50/20/30 rule can be used as a framework to give you, and maybe a partner, some of that simplicity and hopefully some of that insight about your financial situation.
From there, you could really make your budget what you need it to be, so it works for you, because every budget is going to be different.
It might help to remember that these things can take time and that they might need to become a habit before you would start to see results.
So, try not to be too hard on yourself if you slip up, and remember to give yourself a high five for even starting a budget, because so many people don’t even take that step.
Once you’ve taken that first step, the 50/20/30 could give you the flexibility that might make the difference and maybe get you started on that road to financial peace of mind.
Tracking Your Spending
Do you need help tracking your spending to see if you are on the right track with your budget? A SoFi Money® cash management account may be a great option for you. With SoFi Money you are able to see your spending on your weekly dashboard in the SoFi app.
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