Popularized by U.S. Senator, Elizabeth Warren, in her book entitled, All Your Worth: The Ultimate Lifetime Money Plan, the 50-30-20 budget rule is easy enough to follow – you can spend 50 percent of your after-tax income on necessities, 30 percent on things you want and the remaining 20 percent on saving and paying down debt. While this seems like a simple enough roadmap to help you pay down your debt and manage your money, is it entirely right for your personal financial situation?
50 Percent: What’s Really a Necessity?
One thing to keep in mind regarding the 50-30-20 budget rule is that your needs can or will likely change, and possibly even month-to-month. What you need to spend money on or what you can allocate to one particular budget percentage group today could change for tomorrow – so you need to be flexible.
Using 50 percent of your income on necessities might work for you in your earlier years when you aren’t as concerned about your retirement, however, those nearing retirement age may want to think about boosting the cushion on their nest egg. And, spending 50 percent of your after-tax income on what you deem as necessities may not be in your best interest during your retirement years.
- Rent or Mortgage
- Car payments
- Various insurance policies
- Minimum monthly debt obligations such as student loans and credit card payments
- Child care
- Child support
It’s important to keep in mind that not everyone will have these same necessities. You will need to tailor what you consider a necessity for your own personal situation. However, necessities should be kept to things that you need to survive and work.
The 30 Percent: Are You Saving Enough?
The complexity of many types of budgets, with their difficult-to-understand categories, can put people off from even attempting to save or pay down their debt. The popularity of this budget rule lies in its simplicity, however, this simplicity may also mean it is not strict enough for some people. The 50-30-20 rule, with its allowance for spending 30 percent of after-tax earnings on wants, can lead some people to allocate more to non-essential purchases and spending that could be going towards their debt or savings goals.
If you are not living paycheck-to-paycheck, and are considered a high-earner, 30 percent of your income going towards non-essential expenditures can add up, and fast. You should, of course, enjoy the money you worked so hard for, but if you're heavily in debt or planning for retirement, perhaps you could be spending more of your money to pay off your financial obligations and save for a rainy day.
- Dining out
- Entertainment (such as a date night at the movies, concerts or splurging on new gaming consoles)
- New technology when your old tech works
- Shopping sprees
- Magazine or newspaper subscriptions
- Buying more than the amount of cars you need
- Luxury purchases
The 20 Percent: Paying off Your Debt
Although it is entirely possible to pay off debt using the 50-30-20 rule, this method clearly does not favor debt repayment. In fact, with this type of budgeting, you’re able to set aside more for wants and non-essentials than you are encouraged to allocate towards paying off your existing debt.
At 20 percent going towards debt, if you have $5,000 after-tax money to budget with, you're spending $1,000 a month on paying off your debt and savings. On the other hand, if you take home $5,000 in earnings after taxes, and you use 30 percent of your after-tax income for non-essentials, then you’re contributing $1,500 a month, or $500 a month, more towards your wants than goes towards your need to pay off your debt.
General Savings or Retirement Needs:
- Investing extra into a 401(k)
- Setting aside an emergency fund
- Putting money into a high-interest bearing account
- Paying more than minimum on student loan and credit cards
- Taking care of credit card and personal loan obligations
- Staying on top of payday loans
- Setting up automatic transfers to your savings account
- Obtaining life insurance policies
- Considering annuities
Will It Work for You?
Whether or not the 50-30-20 budget rule will work for you or not depends on a few factors. You need to pay attention to your monthly needs pragmatically. And, you have to accept that this is an entry-level introduction to creating a budget that will work for a lot of people.
However, if your situation or circumstances require a bit more in-depth accounting or aggressive money management to get your finances under control, you may want to weigh your budgeting options carefully.
If in doubt, you can do the math yourself or use one of the many 50-30-20 budget calculators on the internet at your disposal to help guide you.
- .30-30 Winchester - Wikipedia
- NerWallet: 50/30/20 Budget Calculator
- Money Under 30: The 50-30-20 Budget Explained - An Easy Budgeting Method To Follow
- Pocketsense: Examples of a Personal Budget
- Pocketsense: Beyond Living Paycheck-to-Paycheck: Why People Struggle to Budget
- Pocketsense: How to Allocate Money for Budgeting
Tara Thomas is a Los Angeles-based writer and avid world traveler. Her articles appear in various online publications, including Sapling, PocketSense, Zacks, Livestrong, Modern Mom and SF Gate. Thomas has a Bachelor of Science in marine biology from California State University, Long Beach and spent 10 years as a mortgage consultant.