As a financial planner, people sometimes ask me how their spending compares to others or how much they should be saving. Personal finance is ultimately just that: it’s personal.
There are plenty of approaches to budgeting and saving out there, but I frequently recommend using the 50/30/20 budgeting rule.
What Is the 50/30/20 Budget Rule?
I think of the 50/30/20 spending rule more like a guideline: it’s a helpful starting point for analyzing your budget to see how much you could spend and save. It breaks down your monthly after-tax income with 50% for needs, 30% for wants and 20% to put toward your savings goals.
As with any guidelines, you’ll have to adapt it to your changing military life, especially when you PCS to areas with a different cost of living. While Basic Allowance for Housing (BAH) can help you estimate local housing costs, the 50/30/20 method provides an alternate approach to consider your spending on major expenses, such as housing costs.
The 50/30/20 strategy ultimately helps military families simplify cash flow with a big picture approach, so you don’t have to stress over every small detail. It also leverages the “pay yourself first” concept by allocating your savings ahead of your remaining spending on needs and wants.
Plan to Spend Half Your Income on Needs
You’ll ultimately determine what aspects of your budget qualify as “needs” vs. “wants” for your lifestyle. But, your needs generally include living expenses. Here are some examples to get you thinking:
- Housing costs (rent, mortgage, property taxes, etc.)
- Utility bills
- Insurance
- Childcare
- Groceries
- Transportation (gas, auto maintenance, car loan, etc.)
If you’re up spending more than 50% of your income on these types of expenses, it might be a sign that you need to downsize the needs you can control – like transportation or housing – to have enough for your wants and savings goals.
Plan to Spend 30% on Wants
Let your values dictate what’s most important to you in your wants category and prioritize those things. Some of the categories in wants might be upgrades from needs (ex. premium cable offerings instead of just basic internet).
Here are some more ideas for wants:
- Restaurants
- Gifts
- Travel
- Entertainment
- Shopping
- Irregular large purchases
Consider setting up separate savings accounts as “sinking funds” for irregular large purchases and or a particular savings goal. Sinking funds allow you to set aside a little bit of money each month for things like an upcoming event, vacation, holiday or birthday presents, home renovation or new appliances.
Plan to Save 20% for Financial Goals
Saving at least 20% of your monthly income provides robust savings for your emergency fund, future retirement and interim goals, such as a house or vehicle down payment. While 20% is well above the national average savings percentage – which typically hovers in the mid-single digits, according to US Bureau of Economic Analysis (BEA), a higher savings rate is the most consistent way to build wealth over time.
It’s especially important to put at least 5% of your basic pay into your Thrift Savings Plan if you’re enrolled in the Blended Retirement System (BRS) so you don’t miss out on “free” matching contributions. Matched contributions add an extra boost to the 20% you are aiming to save, setting up better to meet your long-term retirement goals!
- Consumer debt repayment (if you have credit card debt, this typically needs to be your top priority in this category and perhaps pay above and beyond 20% towards it)
- Student loan debt payments
- Extra payments on your mortgage principal
- Retirement contributions like TSP, Roth IRAs, etc.
- 529 college savings
- Saving up for a house down payment
50/30/20 Budget Example for Military Members
Let’s look at an example of an Air Force E-6. We’ll call him Tech Sgt. Michael Smith. He’s 29 years old, has 10 years of service and lives with his dependents at Robins Air Force Base in Georgia.
- Basic Pay (Monthly Income): $3,987
- Housing Allowance (BAH): $1,428
- Subsistence Allowance: $407
Assuming a 12% federal income tax withholding plus FICA (social security and medicare) and 0% state income tax, he’d make about $5,045 per month, after tax.
His 50% for needs comes out to about $2,522. His 30% for wants would be about $1,513. Then he has 20% to put toward savings and goals. That’s about $1,009 per month.
Starting with the savings, Tech Sgt. Smith is putting 10% (~$500 per month) into his Roth TSP to take advantage of his currently low tax bracket and getting the additional 5% DOD match ($250 a month). If his investments grew at an average of 10% each year for the next 30 years, his $750 monthly savings would grow to about $1.7 million by the time he turns 59!
Tech Sgt. Smith is also saving 5% ($250 a month) toward a down payment on his next vehicle, and putting the remaining 5% toward building his emergency fund and education savings for his children.
By setting his spending on needs at 50%, or $2,522 per month, and setting his spending on wants at 30%, or $1,513 each month, he’s establishing approximate boundaries for those costs.
For example, if Tech Sgt. Smith was paying around $1,900 on housing and utilities and $600 on transportation costs because of a big car payment, his needs fund will begin to creep past 50% when he adds in groceries child care, insurance and other bills. That limits his spending on wants and savings.
If he wanted to re-establish those spending thresholds, he’d have to reassess and make some trade-offs.
Good budgeting is often about trade-offs. The 50/30/20 spending rule can help illustrate these tradeoffs as you’re building and monitoring your financial plan. If your spending in one category is too high, it’s a clue that you might need to reassess.
How the 50/30/20 Monthly Budget Works With the Military Lifestyle
Frequent military moves, along with the accompanying pay changes, can cause your 50/30/20 rule budget to vary dramatically from one location to another – especially in areas with a higher cost of living. Don’t get discouraged if your current spending pattern doesn’t exactly line up with the 50/30/20 rule. Instead, keep it in mind the next time you have an opportunity to reset with a PCS, promotion or other major pay change.
Given that the 50/30/20 rule uses after-tax income figures and much of military pay is non-taxable, many military members get back a sizable tax refund each year.
If you can update your federal tax withholdings via IRS Form W4 with DFAS, you may be able to keep that money in your paycheck each month and add it to the needs, wants, and saving categories on a monthly basis. Otherwise, you could allocate it equally toward wants and savings. Be careful if you find yourself planning to use your tax refund to be able to afford needs expenses.
Tax laws change occasionally, and your specific tax situation can fluctuate due to PCS, bonuses and other factors. Relying on a tax refund to make ends meet can put you in a bad financial situation if you receive a smaller refund – or no refund at all.
Whether you decide to try the 50/30/20 spending rule or another budgeting method, the important thing is to make a plan and track your progress over time. Awareness is your most powerful tool to move closer to your financial goals and set yourself up for success now and in the future!
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