Rethinking the 50-30-20 Rule for Students

Even if you are brand new to the world of personal finance, you have most likely heard of the 50-30-20 rule. US Senator Elizabeth Warren is widely credited as being the individual who popularised this budgeting system.

The system mainly revolves around budgeting your after-tax (a.k.a "take-home") income into 3 broad categories:

• 50% Necessities - This category comprises of your "needs", or items that you quite simply can't live without. This could be transportation costs, bills, utilities, groceries etc.

• 30% Discretionary - This category comprises of your "wants". These are items that are really seen as a luxury or indulgence. Perhaps the grab ride that you take when you wake up late for work, or that shiny new PlayStation.

• 20% Savings/Investments - This amount is put towards your emergency funds, high-interest savings accounts or investments. The general consensus today is to use this portion to fund a 6-month emergency fund before then using the money to invest.

However, I do believe that the 50-30-20 rule was created with the working adult in mind, and this system does present some challenges particularly for students who perhaps work part-time or receive an allowance from their parents. I will discuss this in a few points.

Is 50% For Necessities Sufficient For Students?

Consider two individuals who follow the 50-30-20 rule.

• Bob is a full-time working adult. His take home pay is $2,300 a month. Using the 50-30-20 rule, he calculates that he will have $1,840 to spend on his necessities.

• Aaron is a student in university. His part-time work earns him $200 a month and he gets an allowance of $500 a month from his parents. Using the 50-30-20 rule, he calculates that he will have $350 to spend on his necessities.

Assuming other factors are constant, and both Bob and Aaron live as frugally as they can, it would be significantly more challenging for Aaron to live on $300 for food, transport, phone bills and other necessary expenses.

Most of us understand that as your salary increases, it generally takes a lower proportion of your salary to cover your necessity expenses. But the opposite is also true.

Personal Challenges In Budgeting With The 50-30-20 Rule

Simply put, I am "Aaron" (with $ figures slightly modifed). I'm a university student who has struggled with the 50-30-20 system.

For me, what typically ends up happening is that my 50% portion and my 30% portion ends up blending into one. I started to justify discretionary expenses as being necessities in order to have a larger "capital" to work with when budgeting.

I've ended up in situations where its the 20th of the month, and my bank balance reads "$5.28". I end up having to dig into my emergency funds as well.

I have to be honest and admit that I'm not the best when it comes to budgeting, but I do believe many students out there experience a similar situation with their own budgeting.

So what's a broke college student to do?

For Starters, Focus On SURVIVING

What I've come to learn from my own experiences is that there shouldn't be any shame in breaking your budget or over-spending. We are human, instincts and temptations overcome us, and we make mistakes.

Thankfully for most students in Singapore, we rarely dip into our emergency funds for _actual emergencies. _Many of us still rely on our parents for medical costs when we are ill, and we seldom have dependants at this stage of our lives.

If you are finding that at the end of the month you don't have enough funds for necessities like food and transport, perhaps trim the 20% savings and investments portion to 15%. Perhaps a 3-month or even 2-month emergency fund may be sufficient for you.

And of course, if you can't even cover your necessities, maybe KIV those speculative crypto investments for now!

Think Of How You Can Keep Expenses Low

In the working world, increasing your earning power is generally seen as more desirable to aim for compared to saving and skimping on costs. However, for a student, I believe trying to reduce costs is the main way to go.

Increasing your earning power is typically done through finding higher paying jobs, starting side hustles, and investments. All of which are challenging for a full-time college student.

A college student however, may find it more sustainable and simpler to look at reducing their expenses.

Most students still live with their parents, and simple things like eating at home rather than eating out is one good way to save money.

If cooking is your thing, try meal-prepping. The cost of these meal-prep ingredients are likely absorbed by our parents in your mass family grocery shopping as well.

Food delivery apps and grab rides are an absolute budget-killer too. Be disciplined, go down to the coffee shop to buy your lunch and make sure you wake up on-time so you don't need to grab down for classes or work.

Once Expenses Are In-Check, Think About Your Income Sources

I wouldn't personally ask my parents for more allowance. They may already be paying for your college tuition and I think as young adults transitioning to the working world, we could all do with being more independent.

If it is possible, work part-time. This of course requires a huge degree of time management and independence for a college student. But if you can do it, this could add anywhere from $200 to $500 a month to your funds.

As students, this is where we have to be creative. Finding a money-making opportunity with the limited time, resources and connections that we have is definitely challenging.

There Is No One-Size-Fits-All Budget System

Being a student is a tough time financially for many of us. Juggling ever-riding tuition fees while still trying to have a social life of a young person and going to cafes and nice restaurants is difficult.

I'd love to hear the thoughts of fellow students on Seedly on what budgeting hacks and systems you've adopted that have worked for you!