Budgeting for Success: To Budget or Not with the 50/30/20 Rule
Budgeting for Success: To Budget or Not with the 50/30/20 Rule
Master your finances and enjoy life with smart budgeting strategies and the 50/30/20 rule. Discover the best approach for financial freedom.
We often discuss earning more money and building an income online here on Substack. Platforms like this provide an amazing opportunity to start a new career or a side hustle. But regardless of why you're here to make money, there's one crucial question we should all ask: What do we do with the money we earn?
I’m not here to tell you where to spend your money—instead, I have a simpler question for you: To budget or not to budget?
The Reason Behind the Question: Why I Swear by a Handwritten Budget
A few months ago, I received a comment on one of my short YouTube videos where I talked about why I prefer budgeting with a handwritten planner. The comment wasn’t particularly friendly—it asked, “Who are you, and why do you budget?”
At first, I was a bit confused, but later I wondered if there was something to it.
Side note: I didn’t respond because some comments simply don’t deserve a reply.
Now, back to budgeting. I’m a big fan of using a budget plan and always recommend it to my lovely followers. For several years now, I’ve been budgeting our money with a handwritten plan, which is something I especially recommend for beginners.
Here’s why:
Clarity: A budget gives me a clear overview of my cash flow for the month.
Control: I can plan in advance where my money will go. This is crucial for covering fixed costs, bills, savings contributions, and—if applicable—debt repayments.
Relaxation: I also like having a plan for variable expenses. It helps me feel more at ease when spending because I know I can spend within my financial means.
Freedom: Instead of feeling restricted, I give myself permission to spend since I’ve already taken care of essentials like savings and investments. This gives me peace of mind throughout the month.
Connection with money: Handwriting my budget helps me form a better relationship with my finances. I understand and remember my numbers more easily, and tracking every expense shows me my spending habits.
In short, budgeting works for me because I make conscious spending decisions in advance, and it keeps me relaxed with my money all month long.
But let’s circle back to my original question.
To Budget or Not to Budget? Exploring the Pros, Cons, and Alternatives
What about the disadvantages of using a budget? Are there any?
And when should you skip using one?
Are there alternative tools?
Let’s tackle these questions one by one.
First, are there any disadvantages to budgeting?
No, there aren't. However, there may be times when your budget doesn't go as planned. But that’s not a flaw with budgeting itself—it’s usually due to mistakes we make, especially when we're just starting out. It’s normal to stumble at first, but those mistakes don’t mean budgeting doesn’t work.
Now, when should you not use a budget?
The answer: you should always have a budget, no matter your financial situation. In fact, the more challenging your finances are, the more detailed your budget should be, particularly when it comes to debt repayment and savings.
If your finances are in good shape, you can approach your budget with more flexibility. And that brings me to the next point...
Are there other tools besides a budget?
Yes, there are, but they’re still similar to a budget, just less strict. One example is the "anti-budget," a concept introduced by American personal finance blogger Paula Pant of Afford Anything. While it's still a budget, it's more relaxed.
The idea behind the anti-budget is simple:
Pay yourself first—contribute to savings and investments.
Pay your bills—cover fixed costs, bills, and debt repayments.
Relax with the rest—enjoy the leftover money without the need for detailed spending categories.
It’s important to note that the anti-budget isn’t about overspending. It works well for those who are already mindful of their spending and want to prioritize building savings without tracking every grocery bill. If traditional budgeting has been a struggle for you, this could be a good alternative.
However, whether you choose a budget or anti-budget, one thing remains critical: define your financial priorities. Without clear goals, no system will work effectively.
In conclusion, budgeting in some form is always beneficial, regardless of your financial situation. With different variations available, you can find a method that suits your financial lifestyle. There’s no downside to knowing where your money is going and deciding where it should go—it’s all about shaping the financial future you want.
How to plan your money with the 50-30-20 rule.
As we explore the question of whether to budget or not, let’s take a closer look by creating a practical budget using the 50/30/20 rule.
What is the 50/30/20 Rule? A Simple Path to Financial Freedom
The 50/30/20 rule is a simple guideline that divides your net income into three categories: 50% for needs, 30% for wants, and 20% for savings. This method was popularized by U.S. Senator Elizabeth Warren in her book All Your Worth: The Ultimate Lifetime Money Plan.
The goal of the 50/30/20 rule is to help you manage your finances without tracking every penny. Instead, you focus on getting better deals and saving on major expenses like your mortgage, car payments, and other fixed costs. In a way, this approach aligns with the anti-budget I mentioned earlier.
How Do You Create a 50/30/20 Budget? A Step-by-Step Guide
Net Income
Net income is the amount you take home each month, representing all the money that comes into your bank account. This figure is the starting point for creating your budget using the 50/30/20 rule.50% for Needs
50% of your income should be allocated to necessities—expenses essential for your basic living and that of your family. This includes:
Rent or mortgage payments
Car payments
Groceries
Insurance
Health care
Minimum debt payments and utilities
These are your must-haves. The "needs" category does not cover extras like daily coffee, gym memberships, or dining out. If your necessities exceed 50% of your income, consider reducing your wants or downsizing your lifestyle. This might mean opting for a smaller apartment, a more modest car, carpooling, using public transportation, or cooking at home more often.
30% for Wants
30% of your income is allocated to non-essential expenses, or "wants." These include:
Dining out
Movies
New clothing or accessories
Vacations
Latest gadgets
Manicures
Wants are the little extras that enhance your life and enjoyment. They are optional and can be adjusted based on your financial situation. For example, you could work out at home instead of joining a gym, cook at home rather than eating out, or borrow books from the library instead of buying new ones.
20% for Savings and Debt
The final 20% of your income should be dedicated to savings and debt payments. Savings can include:
An emergency fund (aim for at least three months of living expenses)
Investments for retirement
Down payments on property
Additional debt payments (beyond the minimum required)
Savings are crucial for managing emergencies and preparing for retirement. If you use your emergency fund, prioritize replenishing it. Investing early for retirement ensures a more comfortable future. By focusing on building and maintaining your savings and investments, you enhance your financial security and work towards long-term goals.
Saving can be challenging, and life often presents unexpected expenses. By following the 50/30/20 rule, you can manage your take-home income effectively. If you find that your wants exceed 30%, look for ways to reduce these expenses and redirect the savings to more critical areas, like your emergency fund and retirement.
Enjoy Life Without Financial Stress: How Budgeting and Extra Income Can Work for You
You deserve to enjoy life and don’t have to live austerely. With a solid plan and adherence to it, you can cover your expenses, save for retirement, and still enjoy the things you love. Additionally, wisely using extra income from a side hustle can provide more flexibility within each category.
For me, budgeting remains a crucial aspect of money management, and contrary to some opinions, it doesn’t have to be restrictive. Budgeting helps manage your finances more effectively, ensuring you cover essentials, save for future goals, and enjoy some discretionary spending without overextending yourself. It can be a powerful tool for gaining control over your financial life and achieving long-term goals. The key is to find a method that aligns with your financial goals and lifestyle, making it easier to stick to and adjust as needed.
P.S. What do you think? Do you budget your money? Why or why not, and how do you do it? Take control of your finances and enjoy life without financial stress! Start using the 50/30/20 rule today and share your budgeting success with us👇!