Budgeting is no doubt one of the most important parts of personal finance management. However, categorizing and tracking every single expense is so time-consuming that many people just don’t do it.
If you’ve been living without a budget because it takes too much work, your time for excuses has come to an end.
The 50/30/20 budget has recently emerged as a favorite of minimalists according to the budgeting app Mint. Even U.S. Senator Elizabeth Warren praises it in her book All Your Worth: The Ultimate Lifetime Money Plan.
If you are looking for an easy way to budget your expenses, the 50/30/20 rule may be perfect for you.
What is a 50/30/20 budget?
The 50/30/20 rule, also sometimes called the 50/20/30 rule, is a budgeting method that breaks up your expenses into three main categories: needs, wants, and obligations.
The 50 stands for the 50 percent of your budget allocated to “needs.” These are your absolutely necessary expenses you must pay for to survive. Mortgage and rent, groceries, transportation, and minimum payments on loans or credit cards make up this category.
The 30 stands for the 30 percent of your budget you spend on discretionary expenses. This is the catch-all bucket for everything else. Cable subscription, cell phone bill, entertainment, dining out, and traveling are common expenses in this category.
The 20 stands for the 20 percent of your budget allocated to financial obligations. In this category, you would include retirement contributions and emergency fund savings. Extra loan payments to get out of student debt early would also be in this category.
When you add everything up, you get 100 percent of your budgetary expenses.
Note that this budget does not include things like taxes and health insurance. That’s because those are typically taken out of your paycheck by your employer. The budget here is based on your net pay, the money you receive after everything else is taken out.
Is the 50/30/20 rule too simple?
The 50/30/20 rule makes very general assumptions about your budget and your spending.
However, some people have massive student loan payments that take up nearly half their income alone. Others are debt free, and are trying to save for a future home down payment. In those cases, the 50/30/20 rule does not make as much sense.
Yet overall, for many people this budget method will work. And, if you weren’t budgeting at all before, this is a huge step forward.
When you plan for your future monthly spending, do you use a budget? Do you plan at all, or just figure it out as you go? If you don’t use a budget already, this method could be a great way for you to get started.
It also takes less time and effort than some traditional budgets, where you plan every expense down to a specific category. But, it’s also more detailed than a budget where you just track how much you have in the bank and make sure to spend less.
But if you do use this method to budget, remember that the 50/30/20 percentages are guidelines, not rules. There is a little wiggle room you can take advantage of.
Try to grow the 20 percent part
Financial wisdom tells us that saving is better than spending, particularly with the power of compound interest.
“Pay yourself first,” budgeting says that we should focus on retirement, emergency funds, and other long-term financial goals first. Then we should figure out how to make it work with the money leftover.
Additionally, Wang says, “Aim to save at least 20 percent of your money first, then allocate the rest to spending and you won’t have to save another receipt again.”
Because the 50/30/20 budget defines that category as only 20 percent, you could be shortchanging your future.
In fact, the Center for Retirement Research at Boston College found that individuals earning the average wage should be saving at least 15 percent of their income for retirement alone before looking at things like emergency funds and other savings.
If you are going to use the 50/30/20 rule, consider shifting around the percentages a bit to focus more on savings, investments, and debt payoff. Maybe even make it the 50 percent category, then split the remainder of your living expenses and fun spending into the other 50%.
The more you save and the faster you can get out of debt, the better.
Your finances are unique
No two people have exactly the same financial situation, so the 50/30/20 rule may not fit perfectly. However, for people without a budget or those new to budgeting, these are excellent guidelines for getting started.
Once you get up and running with a 50/30/20 budget, analyze your spending a little more to see how you can grow the 20 percent. If you can grow your savings while keeping expenses in check, you will be setting yourself up for a great financial future.
Interested in refinancing student loans?Here are the top 6 lenders of 2019!
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1 Important Disclosures for SoFi.
2 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.50% APR (with Auto Pay) to 7.27% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 17, 2019, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/17/2019. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on our student loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
3 Important Disclosures for Laurel Road.
Laurel Road Disclosures
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the fixed rate will decrease by 0.25%, and will increase back up to the regular fixed interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.49% effective March 10, 2019.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.50% – 7.27%1||Undergrad & Graduate|
|2.50% – 7.12%3||Undergrad & Graduate|
|2.53% – 8.79%4||Undergrad & Graduate|
|2.50% – 6.65%2||Undergrad & Graduate|
|2.55% – 7.12%5||Undergrad & Graduate|
|3.00% – 9.74%6||Undergrad & Graduate|