How much should I be spending on fun stuff?

By Jon Scott

Abstract: An article explaining different budgeting techniques. This article will best serve those new to budgeting or those seeking knowledge on different budgeting techniques.

For those new to budgeting, the hardest part is determining, “what is a good budget?” An even harder question is how much to spend on the goods, services, and experiences that you want but do not need.

The 50/30/20 Budget

A good benchmark to use is the 50/30/20 rule–which states that you should contribute 50% of your income to living expenses, 30% towards your wants, and 20% towards debt and savings. Let’s dive into this a little deeper. Starting with the 50% for living expenses, housing and shelter should compose no more than 30% of your budget toward housing costs. Keeping housing under 30% is especially crucial when you factor that the remaining percentage after housing costs includes groceries, insurance, health care, transportation (including car payments), and minimum debt payments.

Let’s cover what the entertainment and fun categories cover. The entertainment category includes streaming services, subscriptions to publications, movies, and sport games. Some common fun expenses include vacations, non-necessary clothing, collectors items such as shoes or trading cards, investments in risky assets such as crypto, or even charitable giving.

To break it down further, an example budget would contain:

It’s important to keep in mind that these numbers aren’t rigid. It is more than acceptable for your necessities to fall at 55-60%, or alternatively your wants to grow to 35%. However, percentages do require that exceeding the limit in any of the 50/30/20 categories means reductions in another category–and it’s important to be strategic about which categories to reduce. For example, exceeding the 30% in the fun category (Entertainment and Personal/Fun spending).

But what if this breakdown doesn’t work? For example, let’s say you’re intending to retire early. For example, let’s say you want to follow the F.I.R.E. (financial independence, retire early) method and contribute a minimum of 50% of your income toward savings and investing. This breakdown is going to most likely drastically decrease or nearly eliminate your fun budget, and likely decrease your housing expenses as well.

On the other end of the spectrum, let’s say you are someone who wants to enjoy the finer things in life, and don’t mind spending more? Spending more than 35% on entertainment should be supplemented by spending less on essentials such as housing, insurance, or food. You will not want to reduce your savings and debt payment–if applicable. Savings and investing those savings will (literally) pay dividends that add up over long periods of time if you keep your money invested.

Let’s take a look at some alternative budgets (and the rather extreme F.I.R.E. philosophy).

The 80/20 Budget

The 80/20 budget is for those who want perhaps the simplest method possible. The budgeting strategy involves simply depositing 20% of whatever your paycheck (or however you receive compensation) directly into your savings account. The remaining 80% is up to you. Ideally, you will want to keep the same principle when it comes to housing expenses but for the most part how you spend the rest of the funds is up to your discretion.

The 70/20/10 Budget

The 70/20/10 budget might be the most realistic reflection of American families’ finances today. Specifically, a high inflationary environment in the US plus the increasing price of essentials relative to Americans incomes means consumers must commit more money to essentials each day. This budget reflects that, allocating 70% to essentials. Savings remain at 20%, and 10% goes to paying off debt. For many, especially those living in high cost of living areas this budget may be the best options

How to decide on a budget

There is definitely not a one-size fits all budget. There are a myriad of factors including cost of living, living arrangements, marital status, personal preference, amongst other factors. A good rule of thumb for those budgeting for the first time will be to try the 80/20 rule. As you get a better understanding of how to maintain a budget and a better idea of your financial situation, you may adopt the 50/30/20 budget or 70/20/10 budget. Don’t be afraid to try each for a period of time, and there may be a need to modify your budget as time goes on–don’t be afraid to improvise a little from the framework of the budgets. However, you will always want to make sure to budget for essentials as well as savings and debt payments.