What’s your definition of following a budget? For some, it’s simply paying the bills, while for others it’s not surpassing a certain dollar amount each month in spending. In fact, only one in three people prepare a detailed household budget.
For high earners, like CRNAs, you may assume you don’t need a budget. But budgets aren’t designed to be ambiguous numbers, nor should they be restrictive and stressful. Instead, consider them a helpful guide for understanding how you can spend now and in the future, so you can stay on track toward your financial goals.
There are countless ways you can develop a budget, but one commonly used and easy-to-implement version is the 50/30/20 budget.
What is the 50/30/20 Budget?
One of the hardest parts about budgeting isn’t sticking to it; it’s determining a number that makes sense for your current needs and future goals. Whether you’re just starting your CRNA career or are nearing retirement, the 50/30/20 budget provides a simple guideline for helping you determine where you should allocate your money and what takes priority. As the name implies, your take-home pay is distributed into three categories:
- 50% toward the essentials
- 30% toward personal spending
- 20% toward savings
Now let’s dive into each category in more detail.
Not surprisingly, the largest portion of your net income should go toward your essentials or fixed expenses. There are no hard and fast rules defining what is or isn’t an essential, so ultimately it’s up to you to determine what is a necessary, ongoing expense. For some, an essential is only the bare minimum, such as your mortgage, insurance, groceries, gas, utilities and possibly student loans. Other people choose to expand this category wider to include important (but not necessarily essential) items, such as a gym membership or Netflix subscription.
Remember, the individual items don’t matter as much as adhering to the 50% total. If gym memberships and other subscriptions fit within the total sum, you’re still on track. However, if you find your ongoing expenses far exceed the 50% total, you may find areas where you can cut back.
Consider this the “fun” category! Thirty percent of your take-home pay goes toward any unnecessary lifestyle expenses, such as eating out at restaurants, taking vacations, and shopping. This is the category with the most flexibility. If you enjoy taking frequent vacations or eating out, you may choose to spend up to the maximum 30%. However, if you’re working toward a big spending goal or want to save faster for retirement, this is the category in which you’ll want to cut back.
Although the smallest percentage, this category is also the most important. While you ideally want to stay under the maximum percentage in the essentials and personal spending categories, don’t fall below the 20% for savings. Depending on your personal circumstances, money in this category may go into your savings account or toward other bills. You may want to allocate a portion of the 20% to paying down student loan debt or credit cards, to building an emergency reserve, to making extra contributions to your retirement savings, or to investment accounts.
The 50/30/20 Budget in Action
When it comes to the 50/30/20 budget, nothing is set in stone, and you can adjust these proportions based on your needs and goals.
Let’s say you and your spouse take home $120,000 per year after taxes and 401(k) contributions (or $10,000 per month). For monthly fixed costs, you have $5,000 to cover your mortgage, car payments, insurance, gas, utilities, and groceries. You then have $3,000 per month for your personal spending and $2,000 for savings.
For some, $2,000 per month (or $24,000 per year) in savings may not be enough. If you’re within 10 years of retirement, you may be able to cut back on essential or personal spending and put more toward your saving. Looking at the same income, you may aim to spend 40% on essentials, 20% on personal spending, and put 40% toward your savings.
Establishing Your 50/30/20 Budget
50/30/20 is a helpful guideline when establishing a budget, but allows for plenty of flexibility depending on your circumstances. If you’re just getting started with financial planning and saving, try breaking down your income into these proportions and see how your current expenses matchup.
If you come across any confusion, or have certain goals or needs in mind and aren’t sure how to factor them into your budget, don’t hesitate to reach out to us. At CRNA Financial Planning®, we help CRNAs establish personalized budgets that realistically align with their needs and goals. For guidance or to get your questions answered, call our office at 855.304.3748 or email [email protected].
About Jeremy Stanley
Jeremy Stanley is the founder of CRNA Financial Planning® as well as CRNA Tax Associates®. He has been providing advice and guidance for Certified Registered Nurse Anesthetists (CRNA) for over two decades. As a CERTIFIED FINANCIAL PLANNER™, Jeremy has met rigorous certification and professional standards set by the CFP® Board. He is committed to adhering to the principles of integrity, objectivity, competence, fairness, confidentiality, professionalism and diligence when dealing with clients.
Jeremy is also the author of The Wealthy CRNA and A CRNA’s Life After Anesthesia. The Wealthy CRNA features insights into becoming a financially successful CRNA and how to start planning for your financial future, and has been prior approved for up to 4 Class A CE credits by the AANA. A CRNA’s Life After Anesthesia serves as your financial roadmap for a smooth emergence into retirement. It reviews recent changes in the CRNA industry along with the new rules of retirement and the final steps of legacy planning. This book has been prior approved by the AANA for up to 2 Class A CE credits.
CRNA Tax Associates® is a separate entity from LPL Financial.