Don’t Have Much Money to Invest? Follow the 50/30/20 Budget

The concept of investing may conjure thoughts of business suit-clad men on Wall Street who have enough money to cover unexpected financial calamities. However, contrary to popular belief, you don’t need a six-figure salary or even a whole lot of dollars to start investing. (And, now that you can get hedge fund strategies at your fingertips, you certainly don’t need to be donning a snappy suit somewhere in New York City’s Financial District.)

How much (or, rather, how little) money you have to invest shouldn’t deter you from getting started. Even if you only have a few extra bucks to spare, you only need an investment plan and commitment. After all, building wealth boils down to simply building healthy habits.

One surefire way to get started saving money to invest is by following the 50/30/20 rule. Here’s everything you need to know about how the 50/30/20 budget works and how exactly to stick to it so you can start investing today.

What Is the 50/30/20 Budget?

The 50/30/20 rule divides your after-tax income into three categories:

  1. 50 percent for your needs (i.e. rent or mortgage payments, car insurance, groceries, health care, student loan payments, utilities, etc.)
  2. 30 percent for your wants (i.e. your morning cup of coffee every morning, your Netflix account, Spotify Premium, weekend getaways, etc.)
  3. 20 percent for your savings and investments (i.e. a bank savings account, IRA contributions, investments in the stock market, etc.)

To get started, you’ll need to determine your take-home income, which is what’s left after your employer deducts your taxes and Medicare and Social Security costs. If your paychecks aren’t already taxed (often as with freelancers, for example), you’ll need to determine how much take-home income you’d have after putting a percentage of your paychecks away to pay for taxes down the line. Once you know exactly how much money you’re earning after taxes each pay period, you can break down the 50/30/20 percentages of that number.

How Can You Follow the 50/30/20 Budget?

Saving 50 percent of your income for necessities, 20 percent for savings and investments and 630 percent for wants might feel like an impossible feat. But, again, building healthy habits (and breaking dangerous old ways) is key.

1. Limit your needs.

Your necessities should consume half of your income, which means that you can set aside 50 percent of each paycheck to pay for things like your rent, your car loan, your commuting costs to the office, your phone bill, your groceries, your insurance premiums, your minimum credit card payments and other necessary expenses. And, sure, you have to cover these costs — but there are most likely ways you can cut some of them down.

For example, you need to shop for groceries each week but you can shop smartly by choosing cheaper products, actually applying those coupons you always toss, and cutting back on items you could do without or that never seem to last anyway. Maybe it’s time to shop around for a more affordable health insurance plan or start carpooling to work to split costs. Your minimum credit card payment is also a must, but ask yourself if it needs to be so high next month — what of your wants are costing you more than you’d care to admit?

2. Prioritize your wants.

You can allocate 30 percent of your income to your wants, which means that you can spend a healthy chunk of each paycheck on expenses like dinners, shopping and travel. There’s ample room for improvement here.

How much money could you save yourself if you started making your coffee at home each morning instead of picking it up from a cafe? (Probably hundreds every month.) Likewise, how many smartphone apps that you seldom open still quietly charge you each month? Do you really need new shoes this month, or can you wait until next month when you promise that you won’t rack up your utilities bill?

We’re not saying to starve yourself of your wants; rather, we’re saying that you can still get your fix in more clever, financially feasible and sustainable ways.

3. Invest what’s left.

Once you’ve covered all of your necessary costs and have paid for whatever it is that you wanted, you can invest what’s left of your paycheck (which should amount to 20 percent of your income!). Maybe that’s only a few bucks for now, but it’s still something. Plus, you can probably bank on your salary ultimately increasing over time, so don’t sweat it so much right now.

While many securities, funds and investment opportunities require a minimum amount (the smallest dollar or share quantity you can purchase when investing), you do still have options to invest with little money. The minimum amount is just there to ensure that there are enough assets under management (the total market value of the investments) and to cover overhead costs. It can be difficult for beginning investors to reach these minimums and, even if you can, it may mean investing in just one fund. But there are some options with lower minimums or no minimums at all that make investing accessible to everyone. For example, some mutual funds will allow you to buy in with as little as $5.

That all said, you may want to start saving your money before you start investing any (and paying off any debts you owe). Building up a separate savings account in a bank for emergencies would be wise. That’s because you may not want to touch your investments for some time, but you do want to have some money accessible lest your life plans go awry or, you know, your washing machine inconveniently breaks.

Once you have adequate savings, you can focus on long-term financial security. While investments are riskier than savings, there’s more potential to grow your money.

What’s an Example of the 50/30/20 Budget?

Say, for example, you take home about $5,000 after taxes each month. According to the 50/30/20 budget, your income breaks down like this:

  • 50 percent = $2,500 for necessities
  • 20 percent = $1,000 for savings and investments
  • 30 percent = $1,500 for wants

But maybe your rent or mortgage payment is $2,000 every month but your utilities, health insurance, phone bill and car loan consume more than that remaining $500 in your necessities pool. It’s important to remember that the 50/30/20 budget may take some serious adjustments, which may mean sacrifice or compromise. It’s up to you to take the steps to reduce your needs and wants.

Ultimately, the 50/30/20 rule is just a concept to keep in mind to help you stay committed to an investment plan. Maybe 70/20/10 works better for you, or perhaps you choose an entirely different kind of investment plan. The point is to make a plan and stick to it because, even if you only have a little bit to invest, you can (and should!) start growing that leftover income today.

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