Our journey to Financial Independence

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50/30/20 Rule Is It The Way To Go? 5 Problems with it

If you are reading this chances are you follow some rule of money management or you might just be getting started. Either way, chances are you have heard of the 50/30/20 rule. This dictates you should spend your paycheck as follows:

  • 50% on needs (rent, healthcare, food, etc.)
  • 30% on wants (gym, gaming, take-out, etc.)
  • 20% should be saved 
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This rule was popularised by Senator Elizabeth Warren in her book “All Your Worth: The Ultimate Lifetime Money Plan”. It’s seen as a straightforward way to get started with your finances. I suggest it as a starting point to stop living Paycheck to Paycheck in this article.

On the other hand, I don’t believe we should deal with absolutes. If anything money is personal and decisions will depend on your unique circumstances. Let’s go through the 5 flaws I have identified and how you can bend the rules to fit your lifestyle.

Only 20%?

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If you follow this rule to the letter, you are ultimately encouraged to live wastefully. If you earn more than a median income (UK: £29,900 /US: $31,133) chances is are you could be saving more. Of course, this is contingent on the cost of living in your area and the localized median income. But if you earning a high wage this percentage can easily be increased as you no longer need to allocate 50% to your housing situation.

This is a cautionary tale when it comes to lifestyle inflation. It could be tempting to “upgrade” your life with a new phone or even a new flat. Yet. what is the point of a 10% raise if you increase your living cost by 9%? Following the 50/30/20 rule blindly will only lead to a loss of opportunity.

Understanding this has helped me go from saving 15-20% of my income to consistently saving above 40%. These savings are spread between my Emergency Fund and my investment portfolio that is hosted with an 80/20 split on both Vanguard and Trading 212. (article).

What are your goals?

As you embark or travel along your financial journey you need to set targets. You might be saving for your first house or because you aspire to achieve Financial Independence. Either way, you need to decide on what your financial goals are. 

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Based on your financial situation 20% might be too high or too little. If you are having a hard time deciding on your target check out Brandon’s article “How much money is enough?”. He dives into the numbers and shares 8 ways of figuring out what your answer is. I’ve quickly come to the realization that if I want any chance to achieve my financial goals, I cannot save less than 30% monthly. 

Additionally, if you have a high income, increasing your saving rate could help you achieve your goals faster. Of course, we all remain subject to compound interest and the time it takes to get the ball rolling.

Not as clear cut as it seems

When you read the rule at first it can seem very straightforward. Yet the 50/30/20 rule doesn’t account for the gray areas. The 6 pack of beer or the pack of crisps I bought aren’t essential. Yet I picked them up during my weekly shop. Doesn’t it qualify these items as needs? 

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Additionally, it opens the categories to interpretation. If you are a smoker and it will give you an inclination to include your cigarettes as a need. Although it would cause withdrawal symptoms, we can hardly put cigarettes and housing in the same group.

50/30/20 rule still needs tracking

Although the rule is presented as a simple solution, it still requires that you track your expenses. It isn’t possible to know where your money goes otherwise. You can decide to follow the 50/30/20 rule but without clear tracking, you will have no idea if you are hitting your targets or not.

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A good starting point here could be “paying yourself” first by investing/saving 20% on payday. This way you make the funds inaccessible and make sure you are progressing towards your goals. Automation makes your financial life a breeze. If you want to avoid the headaches that come with constant tracking Financial Minimalism is for you.

50/30/20 is a strain

As much as this rule could lead to wasteful expenses, it might not be possible on a minimum wage. We all have different circumstances and must adapt to them. How often do we hear gurus proclaiming “we can all be rich”. All you need to do is save $500 a month. That isn’t a realistic target for everyone and it’s ok. 

Comparing yourself to others and following arbitrary rules isn’t necessary. I know life can feel hopeless and tough at certain times but there are no certainties. Even if right now all you can save is $10 per month. Well, you are better off than last month. Rinkydoo Finance has a great article to get you started when your pockets are empty.

Should you use the 50/30/20 rule?

There is no 1 size fits all solution. It’s a great starting point to frame your saving strategy. The problem is just like everything else you must take it with a grain of salt. The problem of generalizing financial tips is that all of us have different circumstances. What applies to me might not apply to you.

It’s why I urge you to question everything and do your own research to find what fits you.

Do you follow the 50/30/20 rule or have you adapted it to your lifestyle?

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4 Comments

  1. We never followed a budget. We were not impulse spenders, never tried to impress anyone and were fortunate to have a high income. For people like us a budget would just be extra work. But I think 50-30-20 isn’t too far off for median income families that aren’t trying to retire early. Although I agree the dividing line between wants and needs is fuzzy and can get very emotionally influenced.

  2. Love your blog, Lionel! It’s great to have a questioning attitude because I’ve learned the some of the most successful people have similar mindsets. Really enjoy your view on why you don’t share your portfolio as well. Keep up the great work!

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