Budget 50 30 20
Huh? What does that title say? What do those numbers mean? If you are a fan of Dave Ramsey, you may have already been introduced to this concept. The 50/30/20 budgeting method says that you save or invest 50% on essentials: food, housing, transportation, etc, spend 30% on extras/wants and then you save the remaining 20%.
The FIRE movement, better known as Financial Independence, Retire Early, flips this formula a bit to bring quicker financial independence. With the FIRE model, we spend 20% on extras/wants, 30% on essentials and 50% goes toward savings and investments. By aggressively saving and investing, people are retiring and reaching financial freedom at a much younger age, not delaying enjoyment of life until they are 65 and past their prime years.
Sounds good in theory, but how in the heck does anyone set aside 50% of their income?! Discipline, tracking and creativity. People tend to spend what they earn, and as they earn more, they spend more. This leaves most people in a position that the thought of saving 50% is absolutey absurd. BUT….it can be done.
The very first thing you need to start with is budgeting. Tracking expenses and income is the first place where you can start to get a picture of what your finances are truly doing. I recommend a 2 month review of any cards or accounts you use to spend money from. Categorize and log every expense and average the amount to get an idea of how much you are spending in each area and where you need to trim the fat.
Moving forward, there are two ways to track spending as it happens:
Paper tracking: I’m a paper calendar girl, all the way. If this is you, then a paper spending tracker might be the best for you. My absolute all time favorite is this one:
Not only does this planner have every single topic and section I might need, it also comes in every color and has fun stickers to help make budgeting a little less painful.
2. Budget Tracking App or Program: The beauty of technology is that it allows you to budget on the go and with very little math. I have used the You Need a Budget app for years and it remains my all time, favorite budgeting app. I love it so much, I give it to my children as a gift when they are old enough to start budgeting.
This app allows me to budget in about 30 minutes a month. It can be shared among famiy members and makes changing things and entering transactions on the go a cinch.
Now that you have sorted out your expenses and you know where your money is going, you can decide how you will start to modify your expenses. This can be anywhere from downsizing your home or car to cutting back on that daily bowl of ice cream. I’m a huge fan of the house hack for saving cash.
House hacking is where you utilize what you already own to generate revenue. In it’s simplest form, you may rent out a room or your gargage. House hacking can be so much more than that. There is a stunning amount of opportunity in the things you already have at your disposal.
As a special trick to help you save some of that 50% PASSIVELY, I’m going to let you in on a secret: invest or earn while you spend. This can be done in several different ways.
The first, and my absolute favorite, is spending with rewards credit cards. You have to decide on what particular one is your jam, my personal fave is the Capitol One Venture Card.
I purchase everything I can with this card and pay it off at the end of every month. My rewards have allowed me to have FREE or NEARLY FREE vacations every year!
2. Some things can’t be purchased on a credit card and some people can’t be trusted to pay off their credit card every month. For both of those reasons, my other favorite is Acorns.
By simply linking your debit card, you can passively round up on every purchase and have that extra bit of change invested, all while just going about your business.
So you’ve figured out how to spend a bit less on the essentials and start saving passively, now you want to go hard toward that 50% savings. Even if you are starting at zero, it can absolutely be done, and I’m going to tell you how to do it in two years or less.
Starting this month, you are going to have your employer divert 2% of your pay into a separate account that will be devoted toward investments. Next month, you are going to nudge that number to 4%. You will keep nudging up your savings amount by 2% every month until you hit 50%.
I highly encourage you to also divert any raises into this percentage. While this seems a little intense, it actually is so much easier to shift your spending and mindset over 2 years, rather than all at once. Kind of like with dieting, if you just go cold turkey and stop eating everything you love and waking up at 6am to excercise, you have a pretty good chance of failure.
This is the same type of approach we are using in growing savings. That 50% that seemed so impossible is totally acheivable if you do it bit by bit, over time. By combining awareness of your spending, tracking to make sure you don’t overspend, decreasing spending with tricks like househacks, and utilizing passive savings strategies, you will be at the 50/30/20 goal in no time!
