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50/30/20 budget: It’s easier than it seems

  • Published
  • By Betsy Vicari
  • JB MDL Warfighter and Family Readiness Center
JOINT BASE MCGUIRE-DIX-LAKEHURST, N.J. --  I always thought the expression, "It's not in my budget," was just a figure of speech -- a way people say they aren't interested in participating.

Turns out, they were serious.

Nobody ever told me that I need to budget. Why am I finding out about this now? I never learned about budgeting in school, I never learned about budgeting from my parents. So, I asked my friends about budgeting.

"Just make a plan and follow it," and, "it's easy," my friends told me. "Don't spend more than you make and never carry a balance on your charge cards."

What? How is that possible? Don't spend more than I make sounds easy but what about emergencies? What happens when my car breakS-down or I leave my cell phone in my pants pocket and wash it in the washing machine again?

The answers I received often outlasted my ability to pay attention.

one very easy-to-follow way to budget. There is a rule of thumb called the 50/30/20 Plan.

This budgeting system suggests we use only 50 percent of our after-tax income on our needs, 30 percent on our wants and 20 percent on saving or to pay down debt quickly.

This is a reliable way to live comfortably and below our means, which will afford us the ability to sleep well at night without worrying about financial burdens.

To start this process, first you need to calculate your monthly after-tax income. Next, find the amount of money you have available to spend on your needs (equal to your after-tax income × 0.50), savings (equal to your after-tax income × 0.20) and your wants (equal to your after-tax income × 0.30).

The next step is the most important - distinguishing between needs and wants. This was the hardest part of budgeting for me. Like many, my iPhone has become an integral part of my being and is a necessity. However, I am told that cell phones, no matter how dependent upon them we may be, are wants because they are not a basic necessity.

Needs include rent or mortgage; home, health and life insurance; home maintenance and upkeep; utilities; transportation to work or school; and if you have credit card debt or loans, only the minimum payment due fall in the needs category. Now that you know what needs are and how much to spend on them, the trick is not to exceed that amount even if you have to make major lifestyle adjustments.

The savings category represents the amount of money you should be saving or using to make additional debt payments on your loans and credit cards. The goal is to have an emergency fund, be debt free and begin saving for retirement. Keep in mind, paying off your debt first will give you a higher than market rate, risk-free return on your money equal to the interest rate you are now paying on that debt. What do I mean risk-free investment? For instance, the interest rate on my credit card is 18 percent, by paying off the balance owed; I am making 18 percent on my money - just by not paying someone else that 18 percent.

The wants category includes everything else: cell phones, cable television, internet, gas, extra transportation and auto maintenance costs, entertainment, personal upkeep, clothing, sports, karate classes, books and movies. Soda, pizza, candy and coffee fall in the wants category too. I tried to argue that my five sodas a day constitutes an addiction is therefore a need. Regardless of my addiction to soda, it still falls into the wants category.

The secret is to prioritize your wants. You can have anything you want just not everything you want, if you plan for it and it is within your 50/30/20 budget.

Implementing this 50/30/20 budget now, I am finally in control of my finances. I live on 80 percent of my income and I have sizable savings for emergencies, irregular expenses and enough to replace my iPhone when the time comes. This low maintenance, easy-to-follow plan has helped me become debt-free and live below my means. I am actually happier - not because I am spending less but because I owe less. Try it, you won't be disappointed. Find more information and budgeting help by contacting the War Fighter and Family Readiness Center at 754-3154.