When you hear the word “budgeting”, it’s easy to assume it involves giving up all the expenses that allow you to have fun and enjoy your life. Many people believe it involves giving up leisure, drinks, food, and activities, vacations, guilty pleasure items like clothes, games, and even trips to the movies.
Many people focus on the negatives that can make budgeting seem like an unpleasant task. Fortunately, it doesn’t have to be that way and you can budget for your leisure and fun expenses as well.
Financial experts recommend using the 50 30 20 rule spreadsheet to plan and manage their finances.
What is the 50/20/30 rule?
This plan was made popular by U.S. Senator Elizabeth Warren and her daughter Amelia Warren Tyagi. They introduced this concept in the co-written book “All Your Worth: The Ultimate Lifetime Money Plan,” as a good strategy to help people manage their expenses, save money, and still have cash for leisure spending.
It’s advised that people divide their income into three broad categories.
What are these three categories?
Your after-tax income can be divided into three different categories to help manage your expenses. A 50 30 20 budget calculator can help you calculate the expenses in these categories.
1. Essential expenses
These are the payments and expenditures you have to make and can’t compromise on. Experts advise dedicating 50% of the income to these expenses. Here are some of the essential expenses people have:
- Rent or mortgage for your current home is probably one of your most essential and expensive obligations.
- The cost of utilities like gas, electricity, and water is also an essential expense. No one can live comfortably without them.
- The cost of groceries is an essential expense and this includes everything you eat, even if you’re forced to order a takeout because there was no time to cook food.
- Car insurance, car payments, and car fuel, and other automobile related expenses needed to maintain a vehicle can also be considered essential.
- Phone and internet are essential in the modern world and many rely on them to earn money. The cost of maintaining the service should be included in essential expenses.
- Credit card and loan payments are also essential and should be paid on time. Keep up the minimum payments in order to avoid additional penalties, interest, and expenses.
- Essential bills that might include prescription medication, daycare, babysitting, and after-school program costs, etc.
2. Financial goals expenses
Saving and preparing for retirement is essential because you don’t know what might happen in the future. Saving and securing your financial furniture should take 20% of the income and it can include:
- 401 (k) and any other investments. There are a number of online guides and articles available to help find the best investment options. It’s never too late to start investing in them.
- Unexpected expenses will happen from time to time, which is why it’s important to have some emergency savings. This ensures you aren’t pushed back every time large expenses pop up.
- Debt reduction is also a part of securing the financial future because the more you pay now during financially secure times, the less you have to pay in the future if you face a financial crisis.
3. Personal spending
Now we come to the fun part, which is leisure expenses that help you maintain a good quality of life and enjoy it. These are expenses you don’t need but need for pleasure-related activities. Living a life that’s all work and no play will eventually take its toll so don’t neglect fun expenses entirely. These expenses can take up 30% of the income.
- Dining out or opting for takeout on days you don’t feel like cooking is personal spending. This allows people to date, spend some time with their friends, and have some fun.
- Vacations can actually be considered a necessity because they allow people to de-stress and feel refreshed. You’ll be closer to a burnout without a good-sized break.
- In-home entertainment options like Netflix and other streaming services- Entertainment provides a pleasant break from the daily routine so it’s not wise to neglect it.
- Clothes, decorative items, and other such things might seem trivial but they do add to the quality of life. Dressing up in good clothes makes people feel confident and happy, which shouldn’t be neglected.
If your essential expenses exceed the 50% of your income, you need to make some adjustments because that isn’t sustainable over a long term. It’s important to look for additional sources of income or make adjustments to essential expenses to reduce the cost.
For example, if the house rent exceeds 30% of the total income, it’s time to look for a different house with lower rents. You can use a 50 30 20 budget spreadsheet template to plan the budget.