Money is one of those things that many young adults don’t like talking about, or completely avoid altogether–and I’m one of them. Plus, so many of us were never taught how to budget our finances. We all just turned 18 one day and were expected to know what’s going on.
I’ve had a few years to make mistakes and learn from them, so I hope that my experience can help all of you with your own budgeting and money-saving efforts as well.
Let me start out by saying that I’m no expert at this, and money is something I struggle with every month because I’m naturally a spender. But since doing lots of research and tweaking different budgets to my needs, I’ve finally been able to create a budget and stick to it!
I make about $60k a year, but I also have a fair amount of credit card debt that I’d like to pay off before I graduate college. When I realized I had less than a year to do this, I really had to get my butt in gear to create (and stick to) a budget.
The 50/20/30 Breakdown
After lots of back and forth with numbers, I figured out the perfect way to divide my budget into as few categories as possible while still meeting my financial goals. I was so proud of myself for coming up with this 50/20/30 breakdown that I felt like such a genius. Unfortunately, after a quick google search, I learned that this is actually one of the largest budget frameworks out there. Stealing my thunder.
So, this is no revolutionary discovery to those familiar with budgets, but it’s still worth explaining for those who haven’t heard of it.
Basically, 50% of your after-tax income goes toward essentials such as utilities, mortgage, and groceries. 20% should go straight into your savings and debt. And the leftover 30% is for any fun purchases such as getting your hair done, restaurants, or new shoes. Pretty simple, right?
Although I didn’t come up with this idea, my budget should still prove as being useful because in addition to the 50/20/30 breakdown, I’m also providing four bank accounts that will make sticking to your budget easier than ever.
The Four Bank Accounts You Need
What’s the hardest part of sticking to all those other budgets out there? Keeping track of where your money is supposed to go when it’s all lumped into one account.
This 50/20/30 budget only has three different sections, why not create a bank account for each one? Well, I did just that–sort of. I actually created this budget with four accounts, but I’ll explain why in just a bit.
By doing this, money can automatically be split and deposited from each paycheck in the 50/20/30 breakdown. 50% into one account, 20% into savings, and 30% into another. No more mistaking your rent money for your date night budget.
The accounts you’ll need are Bills & Groceries, Emergency Savings, Normal Savings, and Other Purchases.
Account 1: Bills & Groceries
This is where 50% of your money should go. The name is pretty self-explanatory, as this is the account that covers utilities, mortgage, internet, cell phone, and any recurring subscriptions like Netflix and BarkBox. Basically, anything that can be set up for recurring auto pay should be coming out of this account. Also, all grocery costs come out of this account.
When I say groceries, I don’t just mean food. I mean anything that is consumable and you’ll repurchase from the grocery store. This includes paper towels, diapers, face wash, shampoo, or anything you get from the same store you get your food from. If you opt for more expensive toiletries from a store like Sephora, take those costs out of the ‘Other’ account–those nicer brands aren’t necessities.
Account 2: Emergency Savings
I’ve split the 20% evenly into two accounts: Emergency and Normal savings. Essentially, this is the savings account you don’t ever want to touch unless it is an absolute last resort. You want to put 10% of your income into this account until it reaches at least 6 months worth of living expenses. If you reach that goal, keep saving until it reaches a full 12 months of living expenses. Once you reach that, forget this account exists and don’t touch it unless it comes down to something dire like losing your house tomorrow.
Account 3: Normal Savings
Put the remainder 10% of savings in this account each month. This is the account that its okay to steal from every so often. If your lawn mower throws a rock through your kitchen window, use the money from this account to fix it. You can also use this money for any small emergencies or pre-planned large purchases like a new car or vacation. However, do NOT use this money to supplement splurging on spur of the moment items.
Once you reach 12 months worth of living expenses in your Emergency Savings, you can put the full 20% savings toward this account if you choose.
Account 4: Other Purchases
This is where 30% of your income should go. If it isn’t groceries, bills or savings, it comes out of this account. This is where this budget structure becomes so simple because you don’t have to figure out “restaurant budgets” or “clothing budgets” or whatever budgets–it all comes out of one budget. Think of this as your “fun” budget. You’ve already taken care of the important things, now pamper yourself with the money that’s left over.
This Budget in Action
I’m the type of person who needs to see budgets in real-world examples. Because I’m sure many of you are the same way, I’m going to give you the exact numbers of my income, bills and other financial information so you can see this budget in action.
After-tax Income: $5046
Account 1: Bills & Groceries (50% or $2523)
Car Payment: $502.38
Car Insurance: 172.29
Gas Service: $86.00
Sling TV: $21.82
Bark Box: $21.00
Gym Membership: $5.46
Total: $2523.32, which is exactly 50% of my monthly income
Account 2: Emergency Savings (10% or $504.60)
$504.60 gets deposited straight into my Emergency Savings account every month, which is exactly 10% of my income.
Account 3: Normal Savings (10% or $504.60)
Amazon Credit Card: $200.00
Chase Credit Card: $100.00
USAA Credit Card: $100.00
Capital One Credit Card: $50.00
Savings: $54.60 deposited into Normal Savings account. As credit cards get paid off, I’ll move that money to savings.
Account 4: Other Purchases (30% or $1513)
I spend this money however I want since my bills and savings are covered. Some things that are essentials come out of this budget because they’re not set up on auto-pay, such as gasoline and dog food.
Now’s Your Turn
If you want to implement this budget for yourself, here are the steps it’s going to take:
- Determine your monthly income
Figure out how much money is going to hit your bank account every month. If you have irregular income, write down your minimum guaranteed income for this month. For example, if you make anywhere between $1000-$2500, write down $1000.
- Use the 50/20/30 breakdown
Take your income and multiply it by 0.5, 0.2, and 0.3. These numbers will be the maximum amount you can spend on needs, savings, and wants.
- Make your bills fit into 50% of your income
Add together all of your utility bills, mortgage or rent, groceries, and any other bills that are absolute requirements for living. If all of these equal more than 50% of your income, figure out ways to reduce your spending.
- Set aside 20% for savings or paying off debt
Have this money automatically transferred out of each paycheck so you’re never tempted to spend it. Prioritize paying off your debt before you establish a large savings because your debt will continue to grow with interest.
- Spend 30% of your income as you please
Now that you’ve got the important things covered, spend the leftover money on fun things. But remember, things like restaurants, gas, and all other purchases come out of this percentage. They add up quickly, so take your time spending it.
- Create four bank accounts to organize your income
Creating new checking and savings accounts should be free from your bank. If it’s not, find a new bank. Create the four bank accounts I discussed earlier and stick to their designated purposes.
- Make changes as you go
Maybe you discover that your necessities only cost 45% of your income. Awesome! Put the extra 5% into savings. Or maybe you pay off your debt. Even better! The money you would be putting toward credit card payments should be moved into savings instead.
Don’t worry if it’s a bit challenging at first, the first month will always be the hardest. But once you’ve got this down, it’s going to become second nature. Just keep reminding yourself how great it’s going to feel once you see your savings accounts grow and never have to stress about paying your bills. Financial freedom is the best feeling in the world.
I’d love to hear if you implement this budget or if you have a budget that works for you.