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How to Budget Using the 50/20/30 Rule

April 24, 2017

One of the first steps to financial success is learning how to budget and sticking with it. Setting up a budget provides visibility and control over personal finances, allowing individuals to track how much they are spending and where and helping them avoid frivolous spending by staying within set limits. However, traditional budgets are not for everyone and for young professionals at the beginning of their financial journeys or business owners and freelancers who might have irregular incomes, sticking to a complex budget may be difficult. Fortunately, there is a different approach to budgeting that is more flexible and easy to use — the 50/20/30 budget.

 

This budgeting system is perfect for people who think they are “bad” at budgeting because it does not require meticulous record-keeping or maintenance. Instead, it is simple and less stringent, and can really work where traditional budgets have failed. The 50/20/30 budget works on a percentage system, with 50 percent of total income going toward paying fixed expenses, 20 percent is allocated to savings or other financial goals, and the remaining 30 percent is flexible spending money. Let us break it down a little further:

 

50% – Fixed Expenses/Essentials

 

Instead of allocating money into dozens of different categories as one would in a traditional budget, a 50/20/30 budget only has three categories. The first, and largest, is fixed expenses or essentials. These expenses are the things that take precedence over all other expenses, as they are the things you cannot live without. These include rent or mortgage payments, insurance, utilities, auto or education loan payments, and anything else you consider essential.

 

Groceries are essential expenses as you cannot live without food, but because buying groceries is a variable and not a fixed expense, it can fall under the essentials category or the 30 percent flexible spending category — this is completely up to you.

 

20% – Savings/Financial Goals

 

Remember the financial goals you set last month? This is where they will go. Money that goes to this category is for saving or investing. Whether you are saving to build an emergency fund, putting back money for retirement, or trying to pay off your student loans or credit card debt faster, 20 percent of your take-home pay should be allocated to this category.

 

30% – Discretionary Spending

 

Here is the fun part — the remaining 30 percent of your income is for flexible or “lifestyle” spending. These are things that are not necessarily needed, including travel, clothing, eating out, entertainment, gifts, and anything else on which you enjoy spending money. This percentage is intended to make life fun; however, if you find yourself needing to cut back on spending, this category should be the first to go.

 

The Perfect Budget for People Who Need Flexibility

 

One of the greatest benefits of the 50/20/30 system is flexibility. If you are at a time in your life when you want to achieve a financial goal, such as buying a home or paying down debt faster, you can adjust the percentages you allocate to each category. For example, if you total the costs of your fixed expenses and they equal 53 percent of your total income, you can adjust your discretionary spending category to equal 27 percent each month. It is all about what works for you and your particular financial situation. If you are notoriously “bad at budgeting,” and you have only tried traditional methods, this may be the right method for you.

 

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Woman checking her finances while wearing mask due to COVID-19
2020-07-01
The 6 Financial Lessons That COVID-19 Has Taught Us

Since March, the nation has been reeling from the impact of the COVID-19 pandemic. Millions of people lost their jobs, had their hours cut, or experienced drops in their income. Many families’ finances have been significantly affected by the coronavirus outbreak and are still struggling to recover.   By Kat Tretina   As the nation starts to rebuild — and businesses begin to reopen — here are six lessons we learned during the pandemic that we should all keep in mind going forward.   

1. You need a larger emergency fund

Before the pandemic, many financial experts said that an emergency fund of $1,000 was sufficient for most individuals. Others said that saving three months’ worth of expenses was enough.    If you followed that advice, you may have realized that the guidance left you unprepared to deal with such a serious catastrophe. If you lost your entire income overnight, you quickly exhausted your savings and were unable to pay your bills.    If the pandemic drained your savings account or if you never had an emergency fund in the first place, focus on building one from scratch once you’re steadily employed again. Aim to save at least six months’ worth of living expenses. That may sound impossible right now, but the important thing is to start saving and tuck money away consistently. Over time, you can achieve your goal.   

2. Understand your loan protections

As we found out during the past few months, not all creditors are equal. While some creditors were willing to work with people struggling with their finances during the pandemic, others were not.    Federal student loans were eligible for the
CARES Act, including 0% interest and automatic payment suspensions. Unfortunately, private student loans did not qualify for those benefits.    Some private student loan lenders workers with borrowers and allowed them to postpone their payments, but not all lenders were willing to do so.    The experience highlights how important it is to shop around and choose a lender that offers hardship programs and forbearance options. With ELFI, you may be eligible for up to 12 months of forbearance if you experience a financial hardship, such as a job loss or medical emergency.   

3. Avoid the lifestyle creep

Before the pandemic hit, the economy was strong. Unemployment numbers were very low and credit was easy to get, so many people were inflating their lifestyle. Even high-earners were living paycheck to paycheck to live more lavish lifestyles than they could really afford. When things went south, people were left scrambling to make ends meet.    Living well within your means protects you from a recession and a bad economy. When you spend less than you make, you have more breathing room in your budget, and can weather bad times until things improve.    To avoid lifestyle inflation, create a budget and stick to it. When you get a raise, automatically deposit the difference in your paycheck into your savings account or make extra payments toward your student loans. That way, you won’t notice the extra money, but you’ll improve your net worth. Learn how to avoid the lifestyle creep here.  

4. It’s wise to have multiple income streams

Many people lost their jobs, were furloughed, or had their hours reduced during the pandemic. With unemployment rates skyrocketing and many businesses shutting down, having multiple income streams is more important than ever.    When you have more than one source of income, you’re better able to handle emergencies. Even if you lose your job, you’ll at least have some money coming in to cover your most important bills. Having a side hustle can also help diversify your skill-set, making it easier to find another full-time job later on.    If you can, look for another source of income. You can pick up a side hustle, such as delivering groceries, pet-sitting, or renting out extra space. You can also offer freelancing or consulting services in your field.   

5. Don’t try and time the market

When the pandemic occurred, the stock market plummeted. Many people panicked and sold their investments or raided their retirement plans. It turned out to be a costly mistake, as the stock market rebounded. It’s a key lesson: Don’t try and time the market.   The stock market has natural ebbs and flows, and will experience sharp periods of growth and recessions. Don’t panic and sell during those declines, and don’t try to buy only when you think it’s at its lowest.    Instead, keep your investments where they are, and continue making consistent contributions if you can. Over time, your money will steadily grow, and your patience will pay off. If you're new to investing, you may want to check out these apps to get started..   

6. Pay down high-interest debt

Having high-interest debt can be one of the biggest stressors when the economy is in decline. When your job is at risk and money is tight, your student loans and credit cards are the last thing you want to worry about when you need to pay rent and groceries.    To eliminate that stress, focus on paying down high-interest debt when things are relatively good. By paying off your debt, you’ll save money over time, and you’ll reduce your monthly expenses.   If you want to accelerate your student loan repayment, consider student loan refinancing. Especially if you have private student loans, refinancing your loans can help you get a lower interest rate and save money over time.   Use the student loan refinance calculator to find out how much you can save over the life of your repayment term.*  
  *Subject to credit approval. Terms and conditions apply.   Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.
Woman dealing with financial stress in healthy way
2020-06-29
7 Healthy Ways to Deal With Financial Stress

Do you have debt? If so, you are not alone. More than 74% of Americans have debt of some kind. We know how stressful dealing with debt can be. It can often feel like there is no end to debt payments in sight and can consume your thoughts more than it should. But there are healthy ways to deal with financial stress that can help you pay down debt faster. Read on for some innovative ways to curb financial stress and crush your debt.     According to a Northwestern Mutual 2020 Planning & Progress Study, the average debt for Americans in 2020, just before the COVID-19 impact, was $26,621 per person carrying debt. The debt consists mainly of credit card debt and mortgages, followed by personal student loans and car loans. It should come as no surprise that millennials are feeling the strain of debt as well, with the average debt for millennials being $27,900 in 2019, excluding mortgage debt. Millennials cite credit cards and student loans as their major debt sources. Among all those with debt, 67% have a specific plan to pay it off. While that’s great, that means that three in 10 debt holders have no plan for how they’ll pay off their debt. A plan is a great way to feel more in control and stress less about your debt. With a little bit of strategic planning, it can also help you pay down your debt faster.  

Healthy Ways to Deal With Financial Stress

If you have been reading about debt tackling strategies, you have probably heard of the debt snowball and debt avalanche methods. Those are great strategies, but if you are looking for new and creative (and possibly even fun) ways to deal with financial stress here are some ideas to try out:   

Side Hustle

In 2019, 45% of Americans reported having a side hustle. A side hustle is a great way to earn extra money outside of your day job. The money earned can be extremely helpful to make extra payments on your debt and pay off your debt faster. A side hustle could be a driver for ride sharing, grocery shopping for others, selling items on eBay, tutoring, or dog walking, among many other options. Your side hustle might even be an enjoyable hobby you can start making money from like photography or writing a blog. Doing an activity you enjoy and making money on the side is sure to help ease some stress.    

Dollar for Dollar

For every dollar you spend on non-essential purchases, you spend the same amount on an extra debt payment. Think you want new wireless headphones? Take the same amount you will spend and make an extra debt payment. This method may also help you curb some spending on wants versus needs.    

Sign-Up Bonuses

Looking for a new checking or savings account? Take advantage of banks with sign-up bonuses for opening a new account and use the bonus money to fund your next financial goal.   

Save with Apps

If you like paying with plastic, there are some apps that you can use to help you save for specific financial goals. Some will round up your purchase price to the nearest dollar and deposit the difference into a savings account, one example is the app Acorns. Another app, Qoins, will take the difference and make a debt payment on your behalf. Or use the app, Digit, that will monitor your income and spending habits to determine if there is extra money that can be moved from your checking account into your Digit account. These little amounts can add up quickly to help you meet a savings goal.   

Found Money

According to a 2019 report, 92% of millennials use coupons, whether paper coupons or digital coupons on their phone or online. These coupon savings can then be turned into extra debt payments. Found a coupon that saves you $10 on a purchase you were already going to make? Put that money aside to make an extra payment on your debt. You might also find money from your credit card cash back programs. If you are not carrying any credit card debt, using credit cards to earn cash back is a great way to earn money for purchases you were already making. Instead of using the cash back on a frivolous purchase, turn it into an extra debt payment or the beginning of an emergency fund. If you are shopping online, use a cash back shopping site to earn additional money that can be turned into another debt payment.    

Color Away

Looking to calm your anxiety and see the light at the end of the debt tunnel? Try debt repayment coloring pages. A study in the journal Art Therapy found coloring can reduce anxiety and improve mindfulness. A debt repayment coloring sheet allows you to color a section of the page for each new debt milestone met. They can be a great visual reminder of how far you have come in your debt paying journey and great motivation to make little extra payments when you can. A quick search will show you free ready made pages to start coloring.  

No Spend Challenge

Make a commitment to not spend any unnecessary money for a certain length of time. You could start with a couple of weeks and work your way up to a month long challenge. Set the rules of what you can spend on, but remember it’s supposed to be a challenge. For example you could decide to only spend money on rent or mortgage, utilities, transportation, and food from grocery stores. Any other expenses outside of those categories you don’t spend for two weeks. All the extra money you would normally spend on unnecessary items goes straight to debt payments, emergency fund or any other financial goal you have.      If student loans are one source of financial stress, check to see if student loan refinancing is a good fit for you.* For many people, refinancing is a beneficial way to cut expenses and save in interest costs.    

Conclusion

Debt may be a part of your finances right now, but won’t always be. Make a plan and try to incorporate some of these methods to help make the debt payoff journey easier. Before you know it, you will have your next debt payoff milestone met and will be on your way to a debt-free life. Good luck!  
  *Subject to credit approval. Terms and conditions apply.   Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.
woman learning financial tips from her father.
2020-06-22
The 7 Best Financial Tips Our Fathers Taught Us

Your parents have an enormous influence on your life, even when it comes to your finances. In a study published by the Journal of Economic Psychology, researchers found that parental mentoring leads to lower credit card debt and great financial responsibility among college students. While we hate to admit it, the science proves it: dads really do know best — except when it comes to dad jokes.    In honor of father’s day, here are some of the top financial tips we’ve learned from our dads.   

1. Don’t spend what you don’t have

When you want to make a big purchase but don’t have enough cash, there are plenty of options to finish the transaction. You can use a credit card, take out a personal loan, and many retailers now offer buy-now-pay-later financing when you make a purchase online. While those options allow you to get what you want right now, resist the temptation to use them.    According to fatherly advice, paying interest on purchases — especially when they are “wants” and not strict necessities — is a costly mistake. Interest charges can cause you to pay much more than the purchase initially cost, and lead you into debt.    Instead, only use your credit card when you can afford to pay off the balance in full each month. Otherwise, save up money in a separate savings account, so you pay for what you want in cash.   

2. Treat your own finances like a business

One of the best pieces of fatherly financial advice is to treat your household finances like a business.    Many people don’t really have a clear picture of their finances. Without knowing how much money is coming in or what their goals are, it’s difficult to come up with a financial plan or evaluate whether or not they’re on track.    By treating it as a business, you know exactly what’s going on and have a detailed plan for the future. To get started, follow these steps: 
  • Create a monthly budget: Figure out how much money you earn each month and how much you spend. Track your finances with software like Mint® or You Need a Budget
  • List your current obligations: Make a list of your existing debt, including student loans, credit cards, and car loans. Write down the interest rate, minimum monthly payment, and expected payoff date for each debt. Create a debt repayment plan, so you know when you’ll be debt-free. 
  • Set goals: Establish financial goals, like building a three-month emergency fund or paying off your student loans, and project when you’ll achieve them
  • Cut costs: Identify cost-saving measures, like student loan refinancing. By refinancing your loans, you may qualify for a lower interest rate. Over time, you could save thousands of dollars and pay off your student loans earlier. To find out how much you can save, use the student loan refinance calculator.* 
 

3. Make savings automatic

One way to trick yourself into saving money is to automate the process. By setting up automatic deposits, your money is automatically transferred into your savings account before you can spend it. The money is transferred before you even notice the money, so you can’t mentally prepare to spend it. Over time, automatic deposits can help you build a large emergency fund and save for future goals, like buying a home.  

4. Treat debt like an emergency

Whether you have student loan debt or credit card debt, interest rates can cause you to pay thousands more than you originally borrowed. Especially when you’re just starting out, paying interest charges is an unnecessary drain on your finances.   Follow fatherly advice and treat your debt like an emergency. Keep your expenses low, avoid lifestyle inflation, and throw your extra money toward your debt to pay it off as quickly as possible. If money is tight, look for expenses you can cut and consider picking up a part-time job or side hustle to earn additional income.    Depending on your personality, you may find that using either the debt snowball or debt avalanche method is the best way to accelerate your debt repayment.   

5. Start investing while you’re young

The earlier you can start investing, the better. You can take advantage of compound interest, and give your money more time to work for you.    If your employer offers a 401(k) or 404(b) retirement plan and matches employee contributions, make sure you contribute enough to the plan to get the full matching contribution. Otherwise, you’re losing out on free money, which is part of your employee compensation.    If your employer doesn’t offer a retirement plan, you can open up an Individual Retirement Account (IRA) on your own and make your own contributions.   

6. Protect your credit

Your credit is an essential part of your financial record. It plays a big role in your life, affecting the rates you’ll get on your mortgage and car loans.   Make sure you protect it, maintain it, and work to improve it. Review your credit report regularly. You can review your credit report from each of the three major bureaus — Equifax, Experian, and TransUnion — for free once a year at AnnualCreditReport.com  

7. At the end of the day, no one wishes they spent more time at the office

While most fatherly financial advice is about building wealth, one of the most impactful tips is about remembering what’s important in life. Although your career and your finances are a big part of your life, your friends, family, and loved ones are much more significant.    When someone nears the end of their lives, they never wish they spent more time at the office; they do wish they spent more time with the people who matter most to them. Take that lesson to heart and make sure you prioritize the people you love and maintain a proper work-life balance.  
  *Subject to credit approval. Terms and conditions apply.    Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.