The 50/30/20 budgeting method is a guideline that says you should spend 50% on needs, 30% on wants, and 20% on saving and debt repayment. I find that thinking about my budget this way versus budgeting for each individual line item (i.e., cell phone service, food, Netflix, etc.) is easier to manage with a variable income. You’ll find out how in a second.
For business owners and independent contractors, the book Profit First also gives a unique perspective on how to think about the money you earn. Instead of spending freely as money comes, you allocate money to taxes, profit, and your pay first. Then the rest can go to business expenses. This method is to help ensure you get paid, your goals get met, and business expenses stay manageable.
Using these two strategies, I fashioned a budget by coming up with percentages that I would allocate to each area of my budget – taxes, profit, personal expenses, savings/debt, and business expenses.
These numbers are always changing, but here’s my most current breakdown:
- 40% Taxes
- 10% Business profit
- 5% Business expenses
- 20% Savings and debt
- 25% Personal and joint bills with my partner
Each time I get paid, I divide the cash up according to these percentages, no matter how small or large the payment is. This helps me balance out the feasts and famines in business; instead of going on a shopping spree with a big check, I’m always setting aside money for expenses and other goals.
Now that you have some background, here’s how to put this into practice:
