Let’s start with the why before we get into the how.
The most common reason to have a budget (and actually follow it) is to pay off debt and save more money.
This is why we budget. We’ve got big goals and want to make sure we’re moving towards them and not standing still or moving away from them.
Budgeting isn’t just for paying off a pile of debt or to break paycheck to paycheck cycle.
We thought we knew where all of our money was going. We weren’t living paycheck to paycheck and we’re putting away money for retirement and other savings goals, like vacation and the down payment for an investment property.
And then we started paying attention. Holy sweet mother. It was enlightening to say the least.
We made a few changes that didn’t actually affect our lives much and our budget is much more aligned with our goals and values now.
50/30/20 vs Zero Sum Budgeting
The idea behind zero-sum budgeting is that every single dollar you bring in has a job.
Whether it’s paying your electricity bill, buying a new pair of shoes, or going into your savings account, you know where every dollar is going.
This can seem restrictive at first, but really it’s quite freeing. You can spend money with the peace of mind that it’s going where you want it to, and you have enough allotted for each line item in your budget.
The 50/30/20 budget says you should spend 50% of your income on needs, 30% on wants, and 20% on savings and debt payoff.
This is good general guidance when you’re setting up your budget for the first time.
It helps you figure out a reasonable amount of money to be spending on the different expenses you have, and you can adjust to your specific lifestyle and goals from there.
Method vs. Guidelines
The main difference between zero-sum budgeting and the 50/30/20 budget is that one is really a method and the other is a plan for the actual budget.
Zero-sum budgeting doesn’t provide suggestions as to how much money you should spend where. It is the method in which you budget. It’s how you actually keep track of your money.
The 50/30/20 budget gives you a suggested allocation for where all your money should be going.
I realized all of this by accident when we tried to use Mint as our budgeting software. We used it for a few months but ultimately jumped on the You Need A Budget bandwagon because it just makes more sense to us.
YNAB is hands down my favorite budgeting platform. You can read more about that here.
The budgeting tool in Mint isn’t set up for zero-sum budgeting which made it very frustrating to use.
It doesn’t make any sense in my brain to allocate $100 for this and $50 for this if you don’t allocate all of your income to something.
Where Is Your Money Going?
Knowing how much you’re spending on what is the first step to setting up and following a budget that works for you. But after you account for everything you need to cover for the month, if you have some money left over, what is it going to do?
Is it going to be used for the next month’s bills? Perhaps boost your savings this month? Maybe be a buffer in your checking account?
Whatever the answer is, that’s your answer (profound, I know), and now you’re at zero.
I truly believe that the zero-sum approach is really the only way you can effectively budget. That’s the method, or the how, of your budget.
Something like the 50/30/20 budget is a guideline or suggestion for the allocation of your money. It tells you where your money should go in your budget.
Ultimately, I think comparing the two is really like apples and oranges.
Or the apples themselves and the barrel the apples are in. The barrel holding the apples is the zero-sum budget method, and the 50/30/20 money allocation is the apples inside the barrel.
One is suggested guidelines for money allocation and the other is the method to track that allocation.
Using the 50/30/20 guidelines
Now to get into the nitty gritty of the 50% needs, 30% wants, 20% savings and debt payoff suggestion.
Let’s talk about needs. Step number one is determining the difference between a need and a want. It’s probably not as clear as you’re thinking it is.
You need clothes to wear (unless you live in a nudist colony).
You don’t need to buy the clothes you wear at the mall or a fancy retail store. That is a want. You could very easily buy your clothes at a thrift shop.
You may choose not to shop at a thrift store. That’s just fine, that’s your prerogative. But don’t fool yourself into thinking it’s not an option and you MUST shop at a more expensive retail store, or even Target for that matter.
Or you could go shopping in your closet, for free.
You need a car to get to your job, drop your kids off at daycare, go to the grocery store, etc. You do not need a brand new car of any kind, or even a used fancy car. Those things are wants.
An affordable, economical, reliable car will successfully get you where you need to go for a fraction of the cost of a new or expensive used one.
I’m not saying you must do that, I’m just saying you can. A car is a need. A more expensive car is a want.
Some examples of legitimate needs (not all inclusive of course):
- minimum loan/debt payments (everything else goes in the debt payoff bucket)
- basic internet speed
- utility bills
Here’s where things can get tricky. Trying to determine the difference between a need and a want. And splitting the payment between the two categories, if you choose to get into the weeds at that level.
- faster (more expensive) internet
- organic/brand name groceries
- luxury car payment
- a new cell phone before your current one physically stops working
- eating out
- movies, concerts, etc.
You get the idea. You can really start to break down different payments and costs for things. It’s very possible to allocate the cost of basic internet to the need category and the rest of the cost for the faster internet into the want category.
That sounds very time consuming and tedious. This is a level even beyond my commitment and I love this stuff.
I’m not saying don’t do it. I am saying it doesn’t have to be that complicated.
20% Savings & Debt Payoff
This category is much more straight forward. It’s home to the money you put towards any debt above the minimum payment as well as any saving you’re doing.
Don’t forget about 401(k) contributions that come out of your paycheck before you even see the money. That’s savings people!
Savings includes but is not limited to:
- retirement via 401(k), IRA, etc.
- other long term investments like a rental property down payment or stock market index funds
- down payment for a house
- a car
Putting It Into Practice
The very first step with any sort of budget is to track your spending and figure out where you’re actually starting from.
I think the 50/30/20 guideline is a great launching point if you’re setting up a budget for the first time and don’t really know where to start.
I also think if you’re paying off debt or working towards financial freedom you should jack up your savings rate/debt pay off to much higher than 20%.
Only you can decide how important that really is to you.
Just don’t let your brain tell you “I’m never going to be debt-free or financially independent, so why bother anyway”.
That’s garbage, simply untrue, and 100% NOT an excuse.
It’s Ultimately Up To You
You can absolutely use the 50/30/20 approach and not split up your car payment and internet bill between the needs and the wants category. Perhaps you decide to put all of it in one or the other and make the process much simpler and less tedious.
Finding out where all your money is going may show you that you’re already operating within the 50/30/20 guideline. Maybe saving even more than 20% already.
After putting everything down on paper perhaps you decide a 60/20/20 or a 40/20/40 approach is better for you.
It all depends on what your goals are and where you’re trying to go.
If you’ve read anything I’ve written about budgeting or tracking your spending, you’ve heard this before:
The real point of the process is to become conscious of where your money is going. Intentionally make the choice to send your money off in the right direction.
Don’t let your money run away from you to places you don’t want it to go. Your budget lets you decide where that is.
Once you realize where your money is currently going, somethings will be very easy to cut or re-direct to better align with your goals and values. Other things will be a little harder.
Either way, knowing where you’re starting is the very first step to make sure you’re on the path you want to be on, and not wandering around aimlessly.
Famous Last Words
Regardless of why you’re starting a budget, if you have no clue where to begin or what you “should” be spending on what, the 50/30/20 guideline is a good place to start.
Just know that it’s not as cut and dry as it sounds.
My recommendation is to track your spending, and figure out where your money is going. From there you can make adjustments as necessary to get yourself on the right path.
When you’re walking on the path you know you want to be on, it doesn’t really matter what percentage is spent on wants and what percentage is spent on needs.
If you’re saving enough to meet your goals, the rest is easy.