Financial discipline is key to financial freedom. It’s not what you make, but rather what you do with what you bring home. Whether you’re a parent with two kids or a recent college grad working your first job, our 20/30/50 guideline can help you assess your budget to work towards owning anything! It’s an easy approach to understand where your money is going and how to put a plan in place to own anything! Notice I didn’t say own everything, but rather put a plan in place to own anything you want.
My guideline breaks your budget down into three simple buckets. It’s designed to help you figure out how much you may want to allocate to each area every month, and can also help you determine the order in which your money can be allocated.
20/30/50 Broken Down – Easy as 1-2-3
1. Pay Yourself 20% to achieve financial freedom!
At a minimum, pay yourself at least 20% of your take-home pay toward important payments or contributions that will help you secure your financial freedom. We believe there are three essential goals everyone should strive for first: paying down high interest credit card debt, having a six month emergency fund, and investing to achieve financial freedom and generating wealth through real estate. If you bring home $5k per month, then $1k per month should be investing in yourself to achieve financial freedom! Think about yourself first!
2. Flexible Spending – 30%
Consider budgeting no more than 30% of your take-home pay toward flexible spending. These are day-to-day expenses that can vary from month to month, like eating out, groceries, shopping, hobbies, entertainment, or gas.
We include groceries in flexible spending because even though food is a necessity in your budget, how you spend on food can vary. Some weeks you might eat out more, while others you may buy more groceries to cook at home. It doesn’t really matter what you spend your money on each month in this category, as long as you’re aware of your spending and not going over your total flex budget each month.
3. Fixed Costs – 50%
These are bills and expenses that don’t vary much from month to month, like rent or mortgage payments, utilities and car payments. We also include subscriptions, such as gym memberships and Netflix accounts, in fixed costs because you’re committed to paying them on a monthly basis.
When it comes to fixed costs, we suggest you aim to keep your monthly total no more than 50% of your take-home pay.
One Note About Retirement Income
As you might have noticed, the 20/30/50 guideline applies only to take-home pay. Any contributions you make to retirement before your paycheck hits your bank account are not included. For that reason, 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, especially if you have an employer match program with a 401k program.