Budget 101

In this class activity, we will create a simple personal budget using a 50/30/20 budget plan.

Enter a hypothetical salary. This budget app will calculate your monthly after tax income, and tell you how much should be budgeted for needs, wants, and savings/debt repayment.

I asked ChatGPT to explain the 50/30/20 budget plan to me as if it were an 18-year old.
Alright, imagine you just got your first real paycheck. Feels great, right? But now, you need a plan to make sure you’re not broke by next week. That’s where the 50/30/20 budget plan comes in—it helps you split your money in a way that covers your needs, lets you have fun, and helps you save for the future.

How It Works:

Think of your paycheck as a pizza 🍕. You divide it into three slices:

1️⃣ 50% Needs 🍎 – Half of your money goes to things you have to pay for to survive. This includes:

2️⃣ 30% Wants 🎮 – This is the fun stuff, things you want but don’t need to survive:

3️⃣ 20% Savings & Debt 💰 – The final slice is for future you:

Example:

Let’s say you make $1,000 a month from your job.

Why It’s Smart:

It’s not about being perfect but making sure your money isn’t running you—you’re in control! Would this work for you, or do you think you’d tweak it?


I asked ChatGPT to explain the 50/30/20 budget plan to me as if it were a college professor.
The 50/30/20 budget plan is a widely recognized framework for personal finance management, designed to create a sustainable balance between essential expenses, discretionary spending, and financial growth. It provides a structured approach to allocating income efficiently.

Breakdown of the 50/30/20 Rule:

The budget is divided into three primary categories:

1️⃣ 50% - Necessities (Needs)

2️⃣ 30% - Discretionary Spending (Wants)

3️⃣ 20% - Savings and Debt Repayment

Application Example:

Consider an individual earning $4,000 per month after taxes:

Why This Budgeting Framework is Effective:

This model is particularly valuable for young adults transitioning into financial independence, as it provides clear guidelines without requiring intensive financial expertise. Would you like to discuss how this framework could be adapted for different income levels or financial goals?

 


Then I gave it this prompt:


Let's say I want to buy a house in 5 years, but I also want to contribute to my 401K, and I want to buy a newish car in 3 years, and I have some credit card debt, what should my plan be?

Great! You have multiple financial goals—buying a house in 5 years, contributing to your 401(k), purchasing a car in 3 years, and paying off credit card debt—which means you need a structured approach to prioritize and allocate funds efficiently. Here’s a strategic 50/30/20 plan customized to your goals:


Step 1: Prioritize and Categorize Your Goals

1️⃣ Short-term (0-3 years)

2️⃣ Mid-term (3-5 years)

3️⃣ Long-term (5+ years)


Step 2: Adjust the 50/30/20 Budget to Meet Your Goals

Since you have debt and big upcoming purchases, we’ll slightly modify the 50/30/20 plan to a 40/20/40 approach, where 40% goes to needs, 20% to wants, and 40% to savings/debt.

1️⃣ Needs (40%) – Essential Expenses

🔹 Keep these costs at or below 40% of your take-home income so you can allocate more toward financial goals.

2️⃣ Wants (20%) – Flexible Spending

🔹 Since you’re working toward major financial goals, limit non-essential spending to 20% or less.

3️⃣ Savings & Debt (40%) – Accelerated Plan

This is where we break down your savings & debt repayment strategy:
✅ (15%) Pay Off Credit Card Debt Aggressively – Since credit card interest is high, pay this off first before focusing on other goals.
✅ (10%) 401(k) Contributions – Take advantage of employer matching (if available) to grow retirement savings.
✅ (10%) House Down Payment Fund – If you aim for a 10-20% down payment, start a high-yield savings account or invest conservatively.
✅ (5%) Car Down Payment Fund – Save for a reliable car in 3 years without taking on too much new debt.


Step 3: Timeline & Milestones

Time Frame

Action Plan

Next 12-18 months

Aggressively pay off credit card debt using extra funds from wants/savings.

1-3 years

Build a car fund and purchase a reliable, newer car with minimal financing.

3-5 years

Increase house savings and be mortgage-ready with a 10-20% down payment.

Ongoing

Contribute to 401(k) while managing short-term goals.


Step 4: Adjust as Needed


Final Thoughts

By following this plan, you’ll: ✔ Be debt-free in 1-2 years
✔ Buy a car with minimal debt in 3 years
✔ Have a strong house down payment in 5 years
✔ Continue investing for long-term financial security

Would you like me to create a more detailed savings projection or investment plan based on your estimated income? 🚀


Understanding How Your Accounts Will Grow Over Time

Since you have three different types of accounts—a “Wants” bank account, a “Needs” bank account, and an Individual Retirement Account (IRA) for savings/investments—let’s analyze their expected behavior over time.


1️⃣ Needs Account: Will Hover Near Zero

✅ Purpose: This account is used for essential expenses like rent, groceries, insurance, utilities, and transportation.

🔹 Expected Behavior: Since you’re constantly depositing money into this account from your paycheck and immediately spending it on necessities, the balance will fluctuate around zero. You might have a buffer (for example, keeping one month’s expenses in the account), but overall, this account won’t see significant growth.

💡 How to Manage:


2️⃣ Wants Account: Will Also Hover Near Zero

✅ Purpose: This account covers discretionary spending, such as dining out, entertainment, vacations, and shopping.

🔹 Expected Behavior: Because this money is intended for spending, the balance will go up on payday and quickly drop as you enjoy your lifestyle choices. Unless you deliberately save in this account, it won’t accumulate much over time.

💡 How to Manage:


3️⃣ Individual Retirement Account (IRA): Will Grow Over Time

✅ Purpose: This account is dedicated to long-term investments and wealth-building for retirement.

🔹 Expected Behavior: Unlike the other two accounts, this one is designed to grow over decades because the money is invested in assets like stocks, bonds, mutual funds, or ETFs. Thanks to compound interest, your savings will grow exponentially over time—even if you’re making modest contributions.

📈 Why This Account Grows:

💡 How to Manage:

Final Thoughts

Would you like me to help estimate how much your IRA could grow over time based on different contribution levels? 📈🚀