Home Budget: 50/20/30 method with Paired Spending Accounts
Knowing how I spend my money is the easiest way to live within my means, save and not stress about money. I use a simple budget to review each month, here’s how it works:
- Categorize spending into needs, wants, and savings.
- Streamline monthly review by pairing spending accounts with categories.
- Record a meaningful amount of detail each month.
Step One: Categorize spending into needs, wants, and savings.
My monthly income (after taxes) is what I’ve got to work with. The goal is to use that money to take care of my needs, to save for retirement and big purchases, and to still have money left to enjoy. In All Your Worth Elizabeth Warren and Amelia Warren Tyagi proposed what I think is an ideal ratio:
- “Needs” should be kept less than 50%
- “Savings” should be at least 20%
- “Wants” make up the remaining 30%
Let’s look at an example. Say my monthly income after taxes is $3000:
- Rent, groceries and utilities would hopefully be less than $1500. (50%)
- I’d be saving a minimum of $600 for retirement and other long term investments. (20%)
- I’d have $900 each month to splurge on restaurants and entertainment. (30%)
Let’s try another example, same income, but upgraded apartment:
- Maybe instead my needs (rent, groceries, etc) cost $2000. (67%)
- That would leave us with $600 savings. (20%)
- Just $400 for the things that I want. (13%)
If I was in this situation either I need to make more money, lower my necessary expenses, or decide that living in my expensive apartment is something that I enjoy and that I’m willing to use some of my “want” budget to cover that.
“Needs” are the things that I can’t reasonably cut from my life (rent, utilities, groceries, etc). Most needs are fixed and easy to predict, but food and clothes require an instinctive decision about whether or not it’s a splurge. If my health, income, or basic comfort relies on it then it’s probably a need. If I was living hand to mouth, my first priority would be to lower the cost of my necessities.
I prioritize my “Savings” in this order:
- maintaining a liquid emergency fund that could cover 3–6 months of living
- retirement (tucking away 10% of my overall income each month)
- long term savings investments for “life” events
- extra low interest debt payments (Student loans [mine is 5%] or a mortgage [mine is 3.5%] qualify here as last priority since I’ll save on interest by paying them off sooner, but I’ll likely benefit more from investing. I pay credit cards off in full every month so there is never an interest payment [15–20%] on those.)
“Wants” require some subjective decisions. I need lunch, but I don’t need to buy it at the deli when I could brown bag it and save a few bucks. If I can reasonably do it cheaper or do without it I consider it a want and not a need.
For big purchases, like a vacation, I contribute monthly to separate bank or investment accounts and when the purchase actually happens view them as an annual expense outside of my “monthly” budget.
Step Two: Make it quick and easy to review the month.
I associate certain cards and accounts with Needs and Wants so that adding up the purchases at the end of the month becomes a breeze. There are always a few outliers but they’re easy to spot. I avoid using cash since I prefer to skim over my credit card statements instead of reviewing receipts at the end of the month. Instead I’ll just note my ATM withdrawals and am comfortable knowing that the cash that I do spend all went towards “wants”.
Automatic free monthly transfers from my Checking Account makes it easy to ensure at least 20% gets into “Savings” accounts. Ask your bank about minimum account balances and automatic transfer fees. If your bank doesn’t make it easy to manage your money, then get a new one that will. (I’ve been happy with mine.)
Occasionally I’ll make some irregular income. Since it’s random and not much I don’t work it into my budget, but I still record it to see if and when it makes up enough of my income to make a real difference. If that was how a majority of my income came then I’d estimate my “after-tax” monthly income average and budget using that estimate. I would also keep a bigger than normal emergency fund for lower earning months.
Step Three: Record a meaningful amount of detail each month.
The spreadsheet that I’ve set up has a sheet for Paystubs, a blank 2016 sheet and a sample sheet. Using the sample as a reference you can see how it will look as you customize it for your own use. I made this in Google Docs, but it can be downloaded into Excel format if desired:
