Allston Brighton Community Development Corporation

Working together, building community

By: Meghan Monson, Homeownership Programs Coordinator

A budget is a great tool for distilling a month’s worth of financial transactions – money earned and money spent – into an organized and tangible instrument used for measuring financial well-being. However, many people may not be getting everything out of budgeting that they could be. Welcome to Budgeting 2.0 with the 50/30/20 method!

After having maintained a budget for a couple years, I found myself looking for ways to take my budgeting to the next level. I felt like I was operating at the status quo when it came to my budget. I was listing all my expenses by category, even breaking down my discretionary income into different categories to help it last the entire month. However, beyond listing expenses and planning spending, I realized I wasn’t using my budget as a tool to reach any financial goals or increase financial security. I was reacting to my finances, not using my budget to be proactive.

Then I was introduced to the 50/30/20 method and it revolutionized the way I budget. Developed by Senator Elizabeth Warren and her daughter, Amelia Warren Tyagi, this method weaves in the goal of balancing spending and making your budget sustainable for the short and long term. The method calls for only three spending categories: needs, wants, and savings, and defines a balanced budget as one in which 50% or less of your income goes towards needs, 30% or less of your income goes towards wants, and 20% of your income goes towards savings. Whether you are starting with no budgeting experience or you are a seasoned conventional budgeter, it is simple to begin or transition to 50/30/20 budgeting.

First, it is important to understand what common expenses fall under each spending category. Needs are those expenses that you couldn’t reasonably live without, such as groceries, housing, utilities, transportation costs, and the costs associated with maintaining your assets, such as insurance. Wants are expenses that you have control over and you can choose whether or not to spend your money. Savings is an expense in which you reserve some of your income for your future self and make it unavailable for your present self (see the “Pay Yourself First” blog post for more on this!).

To begin creating your 50/30/20 budget, figure out what your needs are and how much you currently spend on them. If you spend more than 50% of your take-home pay on Needs, you will need to borrow money from the “Wants” category to cover the amount of Needs in excess of 50%. Next, calculate what 20% of your take-home pay is and think about whether this amount is realistic for your savings. If it is realistic to save this amount, then stick with the number. If it is not realistic to save this much, then decrease the number until it feels comfortable. You can work up to saving the full 20% over time. After determining the amounts for Needs and Savings, any money left over is your “Want” money, which you can spend however you choose. Entertainment, dining out, and non-essential services are common Wants expenses.

The spending parameters set forth by this method were developed with financial sustainability in mind both for the short and long term. It is unsustainable to a follow a budget with no money for Wants, nor a budget that is so maxed out by Needs where there is nothing left for savings. Keep in mind that these parameters, the 50/30/20, are goals to work towards. It is okay if your current situation does not fall nicely in line, and if it does not, you can start making spending changes to slowly nudge it in line. For much more in-depth information regarding this method and its applications, you can read Elizabeth and Amelia’s All Your Worth: The Ultimate Lifetime Money Plan



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