The money resolution to keep: 50/30/20 budgeting
By Shawn O’Brien
Creating a solid financial plan should be top on your New Year’s resolution list. Intentional budgeting will be more important than ever, as 2022 could bring with it high inflation rates, possible changes to the tax code, a struggling supply chain, reinstated student loan payments, and more as the world recovers from the pandemic.
One way to accomplish this is by adopting a 50/30/20 budgeting strategy, a simple method to allocate your take home pay to ensure there is some left over for savings. This rule helps build a foundation to save for retirement, education, a down payment on a car or house, an investment opportunity, or any other future financial goal.
By doing some easy percentage calculations, you can break down your monthly income into three main categories – needs, wants and savings.
Needs: 50 Percent
Needs are essential. This category includes items such as your rent, mortgage, groceries, health insurance or health costs, utility bills such as gas or electricity, car payments, or other minimum payments that come due every month, for example: credit card or loan payments. Anything else that does not fall into this category – entertainment, ordering take out, unessential clothing, gym membership – should not be considered essential. Needs are only the goods and services that are necessary.
Wants: 30 Percent
Wants are non-essential. You may think that because you spend within this category on a regular basis that some of these items may be classified as needs, but they often are not. Going out to dinner, ordering take out, buying a new phone, going to a concert, or sporting event, vacations, etc., should all be considered wants. If the line is blurred between wants and needs, think about how necessary the item is. Can you live without it? If you can, it is probably a want.
Savings: 20 percent
The importance of savings cannot be measured. Whether it is a down payment on a house, paying off debt, education costs, a car repair or home improvement project, a vacation or investment opportunity, building your emergency or retirement fund, when you have savings, you have options and financial flexibility. Here is where the 50/30/20 strategy comes in to play to help you save. With 80 percent going toward needs and wants, that leaves you with 20 percent to allocate for savings – while also helping to set financial goals and encouraging you to resist dipping into the 20 percent for other reasons.
Benefits of 50/30/20
Seeing your big financial picture. Categorizing where your money is going can help you set a financial plan in motion. When you measure or track your spending habits and cost of living, you may see opportunities to make reaching goals easier.
Making adjustments. Opportunities to curtail spending habits may become clearer when all of your spending is being categorized. Seeing where your money is going each month can motivate you to change bad spending habits. For example, subscription services you do not use that much or excessive ordering of food delivery.
Peace of mind. Having any sort of plan with your money that may lead to a positive end result can give you a feeling of, not only accomplishment, but relief in knowing progress is being made toward living a less stressful financial life.
To get started, it may be a good idea to gather some of your financials from the last few months. Check out your bank statements, however you receive them. That should give you a good snapshot of where your money is going. If possible, transfer some of your data to a spreadsheet so you can track expenses.
You may choose to start some simple calculations to see where your 50/30 split is. Look at your Needs list – groceries, utilities, etc. Are you allocating more or less than 50 percent already? Are you spending more than 30 percent on wants? Here is where you can make changes if necessary – cutting back on certain spending. Remember, anything other than needs and wants is going toward your savings initiatives, whatever they may be.
The 50/30/20 rule may be a helpful way to reach financial goals and, most importantly, to encourage an examination of spending habits to help you save. Depending on your circumstances or the cost of living in your area, it might not work perfectly for your financial situation. But it could be a great place to start thinking strategically about your money.
Shawn O’Brien is the EVP, Consumer and Business Banking Group Executive at Atlantic Union Bank and leads all the banks’ retail branches, business offering and associated Teammates. A banking executive with more than 20 years of experience, Shawn leverages his horizontal, holistic understanding of banking to lead his team to new ways of considering – and improving – the customer experience.