According to reports, Americans are budgeting more than ever, with 80% saying they create monthly budgets.
But, is your budget working for you? It’s great to have a budget, but if you aren’t able to stick to it, it’s probably not furthering your financial goals.
Survey results say that 50% of Americans don’t have $250 to spare at the end of each month. Creating a solid budget is the best way to manage your money like a pro. However, it has to be a budget that you can stick to.
The 50 30 20 rule is one of the simplest budgeting methods. Depending on your needs, 50/30/20 budgeting can be very effective, but it also has some drawbacks.
Continue reading to discover the reality and myths around the 50/30/20 budget.
What Is the 50 30 20 Budgeting Rule?
The 50 30 20 rule was first popularized by Sen. Elizabeth Warren and her daughter in 2005. The 50/30/20 budget is very simple. Instead of dividing your budget into endless categories, you simply allocate your income into three divisions:
- 50% for needs
- 30% for wants
- 20% for savings
Thanks to its simplicity, the 50 30 20 budgeting rule can be a lot easier to follow than trying to stick to complicated monthly spending breakdowns.
Here’s a deeper view into what expenditure should fall in each category.
Needs are everything you have to spend money on to live, including:
- Basic clothing
- Shelter (ie. rent or mortgage expenses)
- Health coverage
On the surface, this looks very simple, but you might have to dig a little further into these expenses to make sure they truly fall into the “needs” category.
For instance, while you need a home to live in, you don’t need a luxury home. Although food is a basic need, eating out is not, and would fall into the wants category.
Clothing is another area where things can get tricky. For instance, if your wardrobe is fairly utilitarian, most of your clothing spending could probably fall as a need.
On the other hand, if you enjoy experimenting with personal style and tend to shop for clothing as a recreation—a large portion of your clothing expenses might fall in the “wants” category.
Wants are all expenses that aren’t related to basic living. These include things like:
- Entertainment expenses (ie. streaming services and event tickets)
- Non-essential subscriptions
- Hobby expenses
- “Nice to haves” (ie. non worked related electronics)
- Eating out
- Non-essential clothing and personal items
Keep in mind that expenses for “wants” aren’t necessarily bad. Just about everybody needs hobbies and recreational activities. Treating yourself to these experiences and things can bring enjoyment to life and make your other financial goals even more worth working for.
However, wants are the one category of expenses that you have the most flexibility over when it comes to spending control.
The final 20% of your income should go to savings and financial goals under the 50/30/20 budget rule. This can include things like:
- Retirement savings
- Emergency savings
- Savings for a mortgage downpayment
- Debt payments
It might sound counterintuitive to include debt payments in your savings category, but the sooner you pay down debt the sooner you can meet your other financial goals. If you hold high-interest debt, you’ll also save considerably in interest by making regular payments.
However, it’s not always easy to ascertain which to prioritize, debt or savings. If you’re stuck on this point, it might be best to speak to a financial advisor. They will be able to give you tailored guidance that is specific to your individual needs.
While you’re examining the 20% portion of your 50/30/20 budget, you should also give thought to how you’re saving for retirement. If you haven’t already, you might want to look into a traditional or Roth IRA to take advantage of tax savings.
The Advantages of 50/30/20 Budgeting
The 50 30 20 rule might almost sound too simple to work, but the reality is that a lot of people have a better time sticking to simple budgets.
Not only is the 50/30/20 budget easy to follow, but it’s also relatively simple to set up. All you have to do is take a hard look at your expenses and divvy them up.
To make things easy you can automate things like debt and savings payments. If you want to keep a clear divide between the 50% “needs” and the 30% “wants” you can even transfer one portion to another card.
Potential Drawbacks to the 50 30 20 Rule
Although the 50 30 20 rule can be an effective, simple budgeting method, it’s definitely not a one-size-fits-all solution.
Everyone’s financial needs are different, and the idea that you can squeeze every situation into one ratio is a myth.
For instance, most financial advisors will recommend that you spend less than 30% of your income on housing. However, if you’re living in New York City, you might be spending well over $3,000 dollars per month on a studio apartment, and only earning $7,000.
In this case, you will need to adjust your discretional spending.
Alternatively, if you’re a late bloomer when it comes to budgeting and saving, you might want to increase the amount you put to savings every month, rather than sticking to 20% of your income.
Another potential drawback to the 50/30/20 budget rule is that you might need to spend some time getting clear on what are needs vs wants. For instance, a gym membership is usually considered a want, because you can choose to exercise for free at home.
But, if you’re someone who simply won’t exercise unless they go to the gym, then you might want to consider categorizing your gym membership as a need.
Exercising is a key part of health, and can save you between $1,200 and $1,350 per year in medical bills, according to research. If a gym membership is the make or break factor when it comes to you exercising, then this cost could be almost as important as health insurance.
Alternatives and Modifications to the 50/30/20 Budget
The 50/30/20 rule isn’t ideal for every financial situation, but this doesn’t mean you can’t adapt it to suit you.
For instance, if you were a bit slow to the saving party, and you’re already in your 30s, you might want to allocate 30% of your income to financial goals and 20% to discretionary spending.
Or maybe you’re struggling to dissect your needs and wants? If so, another 50/30/20 rule alternative you can try is the 80/20 version. Here, you allocate 80% of your income to expenses and discretionary spending, and the other 20% goes to savings and financial goals.
This strategy is very easy to implement. All you have to do is prioritize payments to things like savings and debts, and once you have transferred 20% of your income for the month, the rest is left for spending.
Do You Need Tailored Financial Advice?
The 50 30 20 rule is one of the easiest ways to set up a budget. However, you will need to carefully evaluate if these ratios are right for your financial needs.
Do you need to save more? Are you saving in the right ways? These are critical questions to ask if you want to build long-term financial security.
The best way to make sure you’re on the right path is to speak to a financial advisor. Here at Bogart Wealth, our financial advisors will be able to give you highly tailored advice on budgeting, wealth management, saving for retirement, tax optimization, and more.
Contact us today for all your wealth management needs.
FAQs about the 50/30/20 Budgeting Rule
Needs include essential expenses like food, shelter, utilities, healthcare, transport, and childcare. Wants encompass non-essential expenses such as vacations, entertainment, hobbies, eating out, and non-essential clothing. Savings include retirement savings, emergency savings, debt payments, and savings for financial goals.
The 50/30/20 rule is easy to follow because it simplifies budgeting by dividing income into just three categories, making it more manageable for many people.
The advantages of the 50/30/20 rule are its simplicity and ease of setup. It allows you to automate debt and savings payments, making it convenient to stick to the budget.
Yes, the 50/30/20 rule may not be suitable for everyone’s financial situation. It doesn’t account for individual circumstances, such as high housing costs in expensive cities or different saving priorities.
Yes, you can modify the rule based on your financial situation. For example, you can allocate more than 20% to savings or adjust the percentages to better suit your circumstances.
To determine if the 50/30/20 rule is right for you, evaluate your financial needs and goals. Consider speaking to a financial advisor to get personalized advice.
The 80/20 version allocates 80% of income to expenses and discretionary spending and 20% to savings and financial goals.