Nothing has historically given me anxiety like the words “personal budget”. In my mind, I would need to build a massive spreadsheet based on budget line items, showing every dollar I spent.
So instead, I would wing it. I just wouldn’t spend any money until I was so frustrated that I’d end up splurging. It’s essentially an emotional roller coaster that has had me cutting off the ends of toothpaste tubes just to turn around and splurge $40 on a bottle of wine.
This approach sucks. For some reason though, I couldn’t get past the emotional block of making sure I knew how much I had to spend and then sticking to it. Until I learned about the 50-30-20 rule.
This personal budgeting approach makes divvying up your money into buckets very simple. 50% of your take-home should go to needs, 30% to wants, and 20% to savings. No budget line items here!
Budgeting for Needs
This bucket is what you have to spend – rent or mortgages, utilities, insurance, debt repayments, car payments, and groceries.
This is the area that requires some big life changes if you’re overspending. The first budget I set had me significantly over the 50% mark. I decided I had to move to a much cheaper apartment. When I started looking around I found there was something grounding about going apartment hunting with a very specific number in mind. In the end, I was able to make a much more informed decision for myself.
I also had to revisit my grocery spending. First I decided to make Aldi my go-to grocery store. I’m a sucker for a boutique grocery store and unfortunately, there’s one that’s only a mile away from me. Once I took a hard look at my grocery spending I realized that all of my small trips had added up in a big way.
I realize for some people options will be limited, but I do recommend getting creative here to try to hit that 50% mark. Do you need a car? Could you pick up a side hustle? Can you channel your old man and watch the thermostat a little more closely? Can you supplement your rent by AirBnBing your couch? Try to think outside of the box.
The final tip I’ll call out here is one I recently learned. Things like groceries need to be split out. There are groceries you need and then groceries you want. For example, the bottle of wine I picked up with my groceries last night is not a need.
I don’t recommend being militant about tracking in this way though. Remember, this is NOT a line item budget. Just keep it in mind when you’re at the store. Would you rather have that bottle of wine, or is there another want on your list that’s more pressing?
Budgeting for Wants
After plotting out my own personal budget with the 50-30-20 rule I learned that I was spending too much money on eating out. I couldn’t believe the way these things added up, if you had asked me I would have said I didn’t eat out much at all.
I also have a bit of an issue with impulse purchases. Something occurs to me and it’s just a swipe away on the Amazon app. This is because I am by nature the type of purchaser called an “impulsive” – I think of something and enjoy the thrill of the purchase. Often I regret it later but might be too lazy to return it, so the new item just takes up space.
My best advice if you’re over budget on wants is to break down your spending into broad categories for the last month and start to see where you might be overdoing it. Just building awareness around your own habits could potentially be enough. Again, a line item spreadsheet here probably isn’t going to be much fun to do every month.
Another strategy is to go on a spending fast. Take the main categories on which you overspend and set your monthly budget to $0 for a month. The idea is to force yourself to build new habits. If you eat out too much – you build habits around meal planning and cooking. If Ubers are your problem you push yourself to walk or bike.
The final thing I’ll note under wants is a strategy that has saved me thousands of dollars… audit your subscriptions! Most consumer-based subscriptions are between $10-$20 for a reason – it’s a small enough price tag that you might just forget about it. Cancel the subscriptions you don’t use and check in with friends and family on sharing those that you do use. Those little monthly fees could be holding you back from a yearly trip abroad, and wine tasting in Italy sounds way better than a subscription to the Starz channel.
Budgeting for Savings
The absolute best way to save is to automate it. Whether or not it’s a 401K or an Acorns or a Vanguard account – just send the money automatically so it’s never yours in the first place.
I also recommend making this money a little difficult to tap into. If it’s too easy (like a savings account attached to your checking) that money might just find its way out of that account.
There’s solid science behind automating your savings (one I write about in emergency saving as well). As humans our pull to not lose something is twice as strong as our desire to acquire something. So once you have money, it becomes difficult to let go of.
That’s the great thing about 401Ks, the money never passes through your personal account, to begin with. Oh, and matching programs are just free money. If you have access to a 401K matching program at your work and you’re not using it – stop what you’re doing and invest now.
If a 401K is not an option there are endless choices for how to automate your savings. Personally, I used Betterment, but started with Acorns. You can also check out a list of Nerdwallet’s recommendations on savings apps.
Maybe you can’t get to 20% until you re-work your other buckets, but saving something is always better than saving nothing. The financial security of having an account that is there to catch you in emergencies is worth more than any item money can buy.
Setting a personal budget can seem overwhelming when you think you need to create a line item budget like some kind of professional accountant. You can simplify the process by using the 50-30-20 rule and then comment below to let me know how it went for you!