50-20-30 Budgeting

Can three simple numbers like 50, 20, and 30 really help you better manage your finances?  They may if you have little experience with budgeting or need a fresh perspective.  Under the 50‑20-30 budgeting approach, you divide your money into three “buckets” for your spending and savings goals. The concept (recently popularized by LearnVest) has been around for a while, and is meant to provide some basic guidelines or rules of thumb to make managing your money a little less worrisome.

Here’s how it works.  The first 50 percent of your after-tax monthly income should cover all your necessities which include things like rent or mortgage payments (or room charges if you are living in a dorm), food, utilities, transportation, clothing.   If you are currently spending more than 50 percent of your monthly income on these types of expenses, the goal is to reduce them over time so that your fixed expenses are in line with the 50 percent guideline.  This will allow you to set aside more money for savings and/or other lifestyle choices.

The 20 percent bucket  is for savings and extra payments on debt such has your car payment or student loans. For example, your monthly payment for your car is considered a necessity or fixed expense so that’s included in the 50 percent bucket. But any extra payments made on that loan to reduce it faster, would be considered part of this bucket.  Also, these savings are meant for longer term goals (e.g. retirement), not short-term goals such as an upcoming vacation.

The final 30 percent is for your wants or lifestyle choices.  The idea here is to recognize that you work hard for your money and therefore, should be able to enjoy some of it.  However, you don’t want these expenses to get so far out of hand that you risk your overall financial health or your ability to meet your fixed expenses. When reviewing your expenses, take care to distinguish between truly necessary expenses versus wants. You may be surprised about how much you have been spending on things like entertainment, going out with friends, gym memberships or pets. Having this vision of what you are spending can really open your eyes and help you reset your priorities.

Here’s an example of how this method might work for a college student (assuming required tuition and other fees are already taken care of either through college savings, grants, scholarships, loans or other support):

Allison has saved $3,000 from her summer earnings and wants this money to last the whole academic year, which means she will have about $375 per month available.  She also estimates that she will take home about $430 a month from her part-time job at the library, and will have about $125 a month left over from her financial aid refund after she purchases her books for the semester.  In all, she will have about $930 a month in income.

Using the 50-20-30 method to budget these funds, she will have about $465 dollars available to spend on her essential/fixed expenses which include rent, food, gas, cell phone bill, car and insurance payments, etc.  Another $186 is designated for savings, which leaves only about $279 a month for flexible spending such as going out for dinner or a movie, hobbies or a new outfit.  Since her shared rent expense on her apartment near campus is currently $300 a month, she likely will have even less flexible spending dollars available unless she reduces other expenses or/and earns more income.

While Allison doesn’t think she can realistically reduce her fixed expenses to 50 percent of her income at this time, she now has a better understanding of where her money is going, how to budget to make sure she leaves enough money each month to pay her bills, and the importance of setting aside at least some savings for an emergency or longer-term goals.

Budget Breakdown

Year Semester Week Month
Summer Earnings $3,000 $1,500 $375
Estimate weekly take home pay $100 $430
Financial Aid Refund (after books) $125
Monthly Income $930
50% $465
20% $186
30% $279

While this method might not be appealing to all students, taking some time to review how you are spending your money and to practice budgeting is a great step in learning to become a financially capable young adult.  It also will prepare you for managing your student loan payments and making smarter financial decisions after you graduate.

What do you think about this approach?  Have a better idea or some tips for reducing expenses that you would like to share with other college students?  Leave a comment here on $tart with Change.

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