What Is The 50/30/20 Rule Budget?
Life is busy. Maybe you've noticed?
With so many competing priorities, it might be easy to lose...
If you're looking to make the most of every dollar of your hard-earned income, then zero-based budgeting might be the best way to budget for you! Here's why.
So, you want to make the most of every dollar of your hard-earned money?
The zero-based budget (zbb, zero dollar budget) might be just the answer that you're looking for!
So, what is zero-based budgeting?
In zero-based budgeting, your income minus your expenses (including savings & investments, and debt payment) equals zero.
Now, hold your horses! Before you go on saying that I said to spend all your money, let me clarify that a zero balance doesn't mean to spend all your money.
Puzzling, isn't it? I know, I've been there before.
On the contrary, the purpose of a zero-based budget is to give every single dollar of your hard-earned money a job. You won’t have zero dollars in the bank at the end of the month because you will have accounted for savings and investment in your budget as per your financial goals.
So let's fire away and find out more about the zero-based budget and the other most common budgeting methods to see which budgeting method is right for you.
Zero-Based Budgeting Explained
What's Ahead
The other most common budgeting methods
The 50 30 20 Budget Rule
You've likely have heard it a hundred times - The 50/30/20 rule budgeting method.
First popularized by U.S. Senator and bankruptcy law expert Elizabeth Warren and her daughter Amelia Warren Tyagi, in their 2005 book All Your Worth, this simple and intuitive budgeting method involves dividing your after-tax income into 3 distinct buckets to help you prioritize your monthly financial commitments:
- 50% to needs and essentials such as housing and food
- 30% to wants such as travel and cocktails
- 20% to savings and debt repayment
Category 1 encompasses your needs, which you cannot live without. These include housing, food (nope, not fine dining or take-out, just groceries you need to basically stay alive), utilities, health insurance, utilities, debt payments, car payments, transport.
A good rule of thumb is to keep your housing costs less than 30% of your income.
Millennials are sadly spending a whopping 45% of their income on rent alone according to a new study.
Category 2 is for the fun stuff - your wants like travel, clothes shopping, new phone, getting your hair done. Yes, this is where your fine dining and take-out live!
Finally, category 3 is for your savings and additional debt repayment.
Pay Yourself First Budget
Designed to help you build up your savings, this reverse budget puts savings before immediate expenses. Reverse budgeting is the opposite of most budget methods where you subtract your expenses from your monthly income.
Here, you focus on your saving goals such as retirement savings or emergency fund, then as long as you meet your monthly savings goal, you can use the rest for bills and other costs. This way you don’t have to crunch every single number.
Cash Envelope System
Studies have shown that you spend on average 15-20% less when using cash. This cash-based budgeting system is great if you are looking to curb your spending, especially in a particular category. When the cash goes poof, then that's it, it's over, gone - until the next month.
Subtract your expenses from your income and then distribute cash among spending category envelopes and take your envelopes to the store when you need to buy something.
This helps you set limitations on how much you can spend.
Things To Note For Zero-Based Budgeting
- The zero-based budget is more favorable toward people with a regular income, but if you’ve got an irregular income, you can set up the budget based on your lowest monthly estimate.
- Using one bank account to manage all your incoming and outgoing transactions is a great way to ensure that you’re sticking to your zero-based budget.
- Categorization is key. The more defined your income and expense categories are, the easier it will be to track your spending.
- Each month, use information from your previous months to inform new spending habits and make better monthly spending projections instead of simply maintaining the status quo.
How to make a zero-based budget
Making a zero-based budget may sound complicated, but it’s not hard. It just takes some practice.
- List and add up all your monthly income sources. Include any and all expected income from your job, side hustle, bank reimbursements, dividend income, and even that $100 from your favorite uncle.
- Identify and add up fixed expenses like your mortgage or rent, utilities, groceries, debt repayment, subscriptions, and transportation, then other expenses such as eating out, entertainment, clothing, etc. Identify savings goals for the months as well.
- Compare money in and money out - they should equal zero. If you have a positive balance, you'll want to allocate that money somewhere. Bump up your savings perhaps?
If you have a negative balance, you will want to reduce your expenses or find ways to increase your income. - Revisit your budget at the end of the month, taking a close look at how your actual spending got to your projections. Repurpose the money accordingly.
Final Thoughts
Making a budget is the quickest way to make your short and long-term goals a reality — no matter where you’re at on the journey. Zero-based budgeting, simple as it might seem, is a proven and reliable spending plan that gives you ultimate control of your money and helps you make the most of every dollar. Get started with a zero-based budget template by following the steps outlined above.
What's stopping you from giving it a shot?
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