Proportional Budgeting Tips
Budgets are like the New Year’s resolutions of personal finance. We all know we should have one and we all know it’s a simple thing to follow—at least in theory. Like resolutions, we often map out personal budgets with the best of intentions, only to abandon them a couple of weeks later.
If you’re new to budgeting or if you don’t feel confident with your current mix of budgeting tools, give proportional budgeting a try. A proportional budget divides your income into categories by percentage. It’s a simple concept to apply, it pairs well with the spreadsheets and/or apps you may already be using, and it can be easily tailored to suit your specific needs. Most importantly, it will make you think about your expenses in a completely new light.
In this guide, we’ll be using the 50/30/20 budget as a starting point. It was first introduced in a book written by Elizabeth Warren and Amelia Warren Tyagi but has since been widely adopted as an effective intro to budgeting.
Step 1: Determine your limits
The 50/30/20 budget recommends that you spend 50% of your income on needs, 30% on wants and 20% on savings. Your first step is to calculate how much money those percentages represent for your financial situation. Take your monthly net income (that’s your take- home pay after taxes and deductions) and multiply it by 50%, 30% and 20% to determine your spending limits.
For example, if your net income is $3,000 a month, you would aim to spend $1,500 a month on needs, $900 a month on wants and $600 a month on savings.
Step 2: Track your spending
To measure your budgeting progress, you need to know where you’re at right now. Track your spending for at least two months. Capture your transactions however you like, but keep in mind that the more accurate you are, the more effective your 50/30/20 budget will be.
Step 3: Sort your expenses
Once you have a snapshot of your monthly spending, sort each of your expenses from the previous month into one of three categories: Needs, Wants and Savings.
Needs are your absolute essentials. Skipping these expenses can lead to extreme hardship, job loss, illness, or legal trouble. Therefore, your rent, your health insurance, your taxes and your credit card minimum payments fall under the needs umbrella.
Wants are all your non-essential purchases. Some of these non-essentials—like movie tickets, fast food, and subscription services—are easy to identify. Others are trickier to spot because they can ride the line between needs and wants.
Savings are any expenses that go toward debt repayment (beyond minimum payments) or savings goals. Student loan payments, retirement savings and emergency fund savings all fit into this category.
Step 4: Make adjustments
Every month, try to get closer and closer to the 50/30/20 limits you determined in Step 1. If you find you’re consistently overspending in a certain category, you have a few options available to you: Find cheaper options for regular expenses, Sacrifice something for another category, or Increase your income.
Step 5: Keep at it
Some months are easier to budget than others. Don’t get discouraged if an unexpected expense or a moment of weakness throws you off your budgeting game. Keep tracking your spending and chasing that balance of 50/30/20.
- The 50/30/20 budget is a good starting point for many people, but it’s not set in stone. If 50/30/20 isn’t meeting your specific needs, try tweaking the percentages to better match your financial goals. A 30/10/60 budget skimps on wants but will help you pay off a debt quickly. A 60/20/20 might be more suitable if you live in a city with high housing costs.
Proportional budgets like 50/30/20 help you determine what your priorities are and ensure that you’re spending your money in a way that’s aligned with those priorities. Whether you stick with it or ultimately transition to another system, 50/30/20 will shape your understanding of and confidence with budgeting.