May 21, 2018
The 50/20/30 guideline is just that — a guide. It can be a helpful benchmark when you’re assessing where your money is going, but it can also be adjusted to your specific lifestyle and goals. Here’s an example of how this could play out in the real world. Here’s a hypothetical budget for Stacey, a 22-year-old recent graduate with her first job, working in Chicago. She has student loans, but she is still able to meet her student loan payment every month and contribute to a Roth IRA, plus pay all her bills.
Her income: $36,000 a year
Her take-home pay after taxes: $2,250 a month (we’re assuming 25% of her salary goes toward a combination of taxes and her 401(k) contributions)
Utilities (including phone and internet): $135
Gym and subscriptions: $75
Total: $1,100, which is about 49% of her take-home pay
Student Loan: $150
Roth IRA contributions: $200
Emergency fund: $75
Backpacking trip fund: $50
Total: $475, which is about 21% of her take-home pay
Lifestyle Costs: $675, which is 30% of her take-home pay
Because Stacey is on a tight budget, her fixed costs are very close to the 50% limit. Still, she is able to make her student loan payment and even put 9% of her take-home pay toward retirement.
A Few Things to Keep in Mind …
As you might have noticed, the 50/20/30 guideline uses your take-home pay as the baseline for your budget. Any contributions you make to retirement before your paycheck hits your bank account are not included, so you may actually be contributing more toward your financial goals than this breakdown would suggest. (And you may find that it’s a good thing to keep that retirement money out of sight, out of mind!)
Also, if you are self-employed and don’t have your retirement contributions withheld from your paycheck, consider contributing more than 20% of your take-home pay toward your financial goals, if you can afford it. This could help you make sure you’re contributing enough to stay on track for retirement.
The 50/20/30 guideline can serve as a useful benchmark, especially if you’re just starting to budget and want to know how to divvy up your paycheck. But when it comes down to it, how you spend (and save) your money depends on your specific goals and lifestyle.