Could You Benefit From The 50/30/20 Budget?

What’s your definition of following a budget? For some, it’s simply paying the bills, while for others it’s not surpassing a certain dollar amount each month in spending. In fact, only one in three people prepare a detailed household budget.

For high earners, like CRNAs, you may assume you don’t need a budget. But budgets aren’t designed to be ambiguous numbers, nor should they be restrictive and stressful. Instead, consider them a helpful guide for understanding how you can spend now and in the future, so you can stay on track toward your financial goals.

There are countless ways you can develop a budget, but one commonly used and easy-to-implement version is the 50/30/20 budget.

What is the 50/30/20 Budget?

One of the hardest parts about budgeting isn’t sticking to it; it’s determining a number that makes sense for your current needs and future goals. Whether you’re just starting your CRNA career or are nearing retirement, the 50/30/20 budget provides a simple guideline for helping you determine where you should allocate your money and what takes priority. As the name implies, your take-home pay is distributed into three categories:

1. 50% toward the essentials

2. 30% toward personal spending

3. 20% toward savings

Now let’s dive into each category in more detail.

The Essentials

Not surprisingly, the largest portion of your net income should go toward your essentials or fixed expenses. There are no hard and fast rules defining what is or isn’t an essential, so ultimately it’s up to you to determine what is a necessary, ongoing expense. For some, an essential is only the bare minimum, such as your mortgage, insurance, groceries, gas, utilities and possibly student loans. Other people choose to expand this category wider to include important (but not necessarily essential) items, such as a gym membership or Netflix subscription.

Remember, the individual items don’t matter as much as adhering to the 50% total. If gym memberships and other subscriptions fit within the total sum, you’re still on track. However, if you find your ongoing expenses far exceed the 50% total, you may find areas where you can cut back.

Personal Spending

Consider this the “fun” category! Thirty percent of your take-home pay goes toward any unnecessary lifestyle expenses, such as eating out at restaurants, taking vacations, and shopping. This is the category with the most flexibility. If you enjoy taking frequent vacations or eating out, you may choose to spend up to the maximum 30%. However, if you’re working toward a big spending goal or want to save faster for retirement, this is the category in which you’ll want to cut back.

Savings

Although the smallest percentage, this category is also the most important. While you ideally want to stay under the maximum percentage in the essentials and personal spending categories, don’t fall below the 20% for savings. Depending on your personal circumstances, money in this category may go into your savings account or toward other bills. You may want to allocate a portion of the 20% to paying down student loan debt or credit cards, to building an emergency reserve, to making extra contributions to your retirement savings, or to investment accounts.

The 50/30/20 Budget in Action

When it comes to the 50/30/20 budget, nothing is set in stone, and you can adjust these proportions based on your needs and goals.

Let’s say you and your spouse take home $120,000 per year after taxes and 401(k) contributions (or $10,000 per month). For monthly fixed costs, you have $5,000 to cover your mortgage, car payments, insurance, gas, utilities, and groceries. You then have $3,000 per month for your personal spending and $2,000 for savings.

For some, $2,000 per month (or $24,000 per year) in savings may not be enough. If you’re within 10 years of retirement, you may be able to cut back on essential or personal spending and put more toward your saving. Looking at the same income, you may aim to spend 40% on essentials, 20% on personal spending, and put 40% toward your savings.

Establishing Your 50/30/20 Budget

50/30/20 is a helpful guideline when establishing a budget, but allows for plenty of flexibility depending on your circumstances. If you’re just getting started with financial planning and saving, try breaking down your income into these proportions and see how your current expenses matchup.