How to Plan a Budget that Can’t Fail

For most people, budgeting is a nightmare. You might still harbor childhood memories of your parents hunched at the dining room table over a pile of receipts and a calculator, looking shell-shocked and bickering. Or you might have tried to track every single purchase you make in a month, only to give up after the first couple of months (or days, or weeks) because tracking every penny is impossible.

It’s also not as helpful as you may have been led to believe. Tracking your expenditures can help you see where your money is going, and that might be able to help you optimize your spending, saving, and investing, but if the goal is to have less money going out every month, tracking what you spend isn’t the answer. Why? Because you can track your spending all you want, but in the end, the money will still have been spent.

Use the 50/30/20 Rule

Instead of tracking spending, you need to use the 50/30/20 method. This method requires you to figure out your monthly fixed expenses, like rent, groceries, medical costs, debt repayment, and utilities, which should take up 50 percent of your income. Twenty percent of your monthly income should go to savings and investments, and the remaining 30 percent of your money is your spending allowance — you can use it guilt-free to buy whatever you want or need.

Now, this ratio may need to be tweaked somewhat, depending on your personal circumstances and changing expenses. Maybe your essential expenses will take up 60 percent of your income. Maybe one month you’ll have an unexpected expense and need to cut into your spending money a little to cover it. But the basic idea is that you’ll be able to plan to cover your essential expenses, put some money away for retirement and other financial goals (like a wedding or a house down payment), and still have some money to spend guilt-free most months — without the hassle and stress of tracking your spending each month.

Calculate Your Fixed Expenses

Whether you’re going to start budget planning with a budgeting calculator or app, or you’re doing it the old-fashioned way with pencil and paper, you need to start by calculating your fixed expenses. For most people, that’s going to look something like this:

• Rent or mortgage
• Car payment
• Student loan payments
• Utilities
• Insurance (car, homeowners, renters, life, and health)
• Credit card payments
• Groceries
• Medications and other medical expenses
• Subscriptions (Hulu, Netflix, Amazon Prime)

Your list might include additional expenses like childcare, pet supplies and veterinary costs, and so on. Add up all of these expenses, and, for at least the first month, add on another 15 percent or so to cover anything you may have forgotten about.

Set Your Savings Goals

The best way to reach your financial goals with savings is to do so passively — have 20 percent of each paycheck automatically transferred into savings and retirement accounts. If you have a 401(k), your company already takes retirement savings out of your paycheck before taxes, and you should have money automatically deposited into a Roth IRA. But you should have additional money transferred into a savings account to meet your other goals, such as building an emergency fund and saving for down payments, vacations, and upcoming seasonable expenses, like holiday gifts and property taxes. Save at least five percent of your take-home pay for retirement, and the rest can go towards other goals.

Track Your Discretionary Spending

Once you’ve covered your essential expenses and savings goals, you can spend the rest of your money guilt-free every month. Spend it on whatever you want — go ahead and get the morning latte or avocado toast. But you’ll need to keep track of it so you don’t overspend.

Don’t worry, it’s easy. You can use an app like Mint to track your spending, or you can simply put all of your discretionary spending on the same card every month — when the balance gets close to your monthly limit, you’ll know it’s time to tighten the belt. Just make sure you pay off that card in full every month to avoid high interest charges.

A foolproof budget isn’t a pipe dream. With the 50/30/20 rule, you can make ends meet, reach your financial goals, and still have money to spend on fun stuff without feeling anxious about it — and you don’t have to make a single spreadsheet.