The 50/30/20 rule was introduced as a popular budgeting approach by U.S Senator Elizabeth Warren. The approach is aimed at effectively distributing your finances toward your goals and expenses in a practical, yet simple way. This technique helps you divide your monthly income into set monthly expenses, additional things you may need, and your savings goals. rnIf you’ve been struggling to manage your money, this technique will help you create a spending plan that works. rnOne great advantage of the 50/30/20 budgeting rule is its ability to help students finance their own education loans by dividing their monthly income into practical portions. rnLet's explore the technique in greater detail to get a better view of how it helps students achieve a sense of financial freedom in a practical and stress-free way.rnHow Does The 50/30/20 Rule Work?rnAs discussed above, the budgeting rule helps you divide your monthly income into three categories; needs, wants, and savings. If you haven’t had much luck with other budgeting methods that restrict your spending or encourage you to track every expense, this one might allow you a little more space to breathe. rnTo implement the rule, it’s recommended to start off by calculating your after-tax income. This will give you the amount of money you have in hand to work with. Once you have that number, this will be the breakdown:
• 50% of your total monthly income will go toward your needs.
• 30% of it will be allocated to your wants.
• 20% will be saved. rnHere’s a further breakdown of each of these numbers and how you can use this technique to pay off your student loans.
50%—The Money You NEED To Spend
Your needs are fixed expenses that you need to pay monthly, at any cost. Some examples of such items are your mortgage payments, groceries, insurance premiums, and childcare. rnA useful aspect of this part of the budget plan is that you can customize it according to your own needs. This comes in handy when you have student loans to pay off; add them to the allocation to take care of them systematically. rnIf you’re opting to
refinance your student loans, you can work out a monthly payment that maintains the integrity of your needs budget and further expenses with your lender, like
Education Loan Finance. This kind of settlement is harder to achieve if you’re directly paying back the amount to your original lending institution—for example, your bank—because the terms and conditions are stricter, and the interest rates are also usually high. rnThere are two reasons this section constitutes a flat half of your income. The first reason is that it gives you a way to balance your income and expenses and helps you recognize the areas that might not be sustainable in the long-term. rnFor example, if your apartment rent is over $2,000 and has started to push your needs budget beyond 50%, that might indicate you need to find a more affordable place to live—or find a way to make better money. rnThe second reason is to make sure that around 50% of your income is always there to protect you in times of financial need or uncertainty. This could come in handy in case of you losing your job or even an unexpected healthcare expense.
30%—The Things You WANT To Spend On
After your 50% needs budget is divided into monthly necessities that you need to pay off or maintain, your remaining 50% is further divided into two categories. 30% of it goes to your wants, and 20% of it goes toward savings. rnThe 30% wants budgets may include things that you additionally have to spend on but aren’t necessities. This category may include Netflix subscriptions, gym memberships, weekly lunches with your friends, or a couple of new dresses. rnYou may nickname this budget your “fun allowance” and use as much of it as you want, as long as you don’t push it beyond the 30% division of your after-tax income.
20%—The Money You Need To Save
This category is solely aimed at allocating a small portion of your income toward your long-term goals and financial planning. This category can be used as an emergency fund to turn to in case an unforeseen financial challenge. rnOther ways of looking at this category could be a retirement account or money that you want to put toward an investment. rnStudents looking to pay off their student loan debt may also direct a portion of this money to speed up the payment of their loans, as long as the payment period lasts.
A 50/30/20 Budget Example
To showcase the technique and in real-time, let’s look at an example. Let’s assume that your monthly after-tax income amount is $4,500 (including other deductions)
Now, according to this:
• Your 50% needs budget amounts to $2,250rn• 30% wants budget is $1,350rn• 20% savings category totals $900
Now let’s look at your expenses for the month:
• Apartment rent: $1,200rn• Loan payment: $450rn• Other utilities: $200rn• Gas payment: $150rn• House supplies and groceries: $350rn• Club membership fee: $165rn• Lunches with friends: $260rn• Taking your partner on dates: $600rn• New shoes and accessories: $150rn• Credit card payment: $75rn• Health insurance: $100rn• Getting nails done: $175
According to these expenses, here are what the three categories look like:
• Needs: apartment rent, loan payment, utilities, gas payment, house supplies, credit card payment and health insurance = 2,200 (Saving $50 here)
• Wants: club membership, lunches with friends, dates with your partner, new shoes and accessories, getting nails done = $1,350 (No saving here)
• Savings = $900 (+ $50 from the needs budget)
According to these expenses you’re doing pretty good and are even saving $50 on the needs budget. Your needs budget is breaking even and you’re sending a solid $900 toward savings. If you’re a student, you can divide your savings budget and send $300 extra toward your student loan payments in order to speed up the process and pay the loan back sooner.