The concept of the 20/50/30 budget comes from a book named,  ALL YOUR WORTH The Ultimate Lifetime Money Plan by Elizabeth Warren and Amelia Warren Tyagi.
 
The concept they suggest is that you divide your expenses into three categories: Savings, Must Have’s, and Fun Money.  These categories should aim to have the following percentages: 20%, 50%, and 30%, respectively.  Every month when you get paid, you want to put money into the Savings category, then the Must Have’s category, and lastly the Fun Money category.  Remember to always pay yourself first by putting money in the Savings category first.

Savings include emergency fund, retirement fund, and big-ticket future purchases.  It should constitute about 20% of your expenses.  If you have credit card debts that you can not pay in full, those debts are borrowings from your future.  You should stop adding to your debt to the future and start paying it off.  Whatever you pay on the debt is to improve your future/retirement situation.  The 20% on Savings can be divided into 10%+10%.  Use one of the 10% to pare down your debt as soon as possible.  Use the other 10% to save for emergency fund and retirement fund.  Once you are debt free, then you can use that same 10% to save for big-ticket future purchases such as a car or a house. 

The Must Have’s include expenses like housing, food, utilities, insurance, and transportation.  It should constitute about 50% of your expenses.  If you don’t know if an expense item is a Must Have item or not, simply ask yourself this question: “Does this item help me to sustain my life?”  If the answer is yes, then it’s a Must Have expense.  For example, transportation expenses allow you to get to work to make money so you can survive.  Insurance protects you and your family in case you lose your life, health, house, or ability to work, so it’s also a Must Have item.  You may ask, “What about Cable TV or Home Internet?”  If Cable TV and Home Internet are not necessities that directly contribute to you making money, then they are not Must Have items.  


Fun money include clothes, personal hygiene items, entertainment, vacation, gifts, electronic gadgets, furniture, and everything else not in the Must Have’s or Savings category.  It should constitute about 30% of your expenses.  Once you know how much you need to budget for Must Have’s and for Savings, then the rest of the money is Fun Money.  You can feel free to spend the Fun Money however you want, without guilt.

Knowing how much you spend in each category gives you the guidance you need to adjust your spending.  Sometimes, it may not be pleasant, but it will be necessary if you want financial freedom.  For example, if you find that you spend 70% on Must Have’s due to housing, then you will need to move to a smaller dwelling so you don’t spend most of your income on housing.  If after some budgeting you find that you spend 50% on the Fun Money category, then you know it’s time to eliminate some entertainment, dining out, expansive vacations, clothes, and/or gadgets. 

It is really interesting to figure out your percentages! Sometimes we don't even know why we have no extra money at the end of the month! This is a SIMPLE way to see what's going on and keep on track. Try it!!!! I dare you!