Why The 50-30-20 Rule Sucks

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“We are what we do and say, not what we intend to.” - Kurtis Hanni

Why The 50/30/20 Rule Sucks

In this piece, we are going to take a look at the 50/30/20 budget technique.

While I’m not a huge fan of a strict budget, I do recommend tracking your spending. Making sure your monthly expenses align with the 50/30/20 rule can be a great way to keep your finances in check, but there is room for improvement.

Without further ado, let’s break down this framework, and learn how we can make it even better. 👇️ 

50-30-20 Explained

First things first, each number stands for a percentage of your after-tax income that will be allocated to a certain bucket:

50% Needs - Examples of this are housing, food (not eating out every day), utilities, childcare, transportation, etc.

30% Wants - This is where you get to have a little fun. In the budget world, these would be classified as “non-essential” items. Gym memberships (this is a need for me), vacations, eating out, streaming services, and electronics. Anything you could live without, but is nice to have.

20% Savings - This 20% can be allocated in a number of different ways. If you don’t have an emergency fund, it should go straight to savings until you have at least 6 months of living expenses saved up. If one is in debt, a portion should go to debt paydown.

Assuming both of those are checked off it could be used to buy a few ETFs and start investing (5 ETFs You Need To Know).

Does It Work

As with everything in finance, it depends.

Let’s take two different examples. One median-income earner and one high-income earner. Fiftythirtytwenty.com has a number of different examples applying the 50/30/20 rule, but here is the summary.

Our median income example is going to be based on a married couple with two children in Boise, Idaho. Their annual income is $72,000 leaving them about $4,480 each month after taxes.

• Housing costs: $719

• Healthcare: $729

• Groceries: $782

• Transportation: $72

• Childcare: $887

• Total: $3,189 or 71% on needs.

As shown above, for low low-income earners following the 50/30/20 rule can be challenging.

So what about the six-figure players (approx $6,500 a month after taxes)?

• 50% for expenses - $3,250

• 30% for wants - $1,950

• 20% for saving/investing/debt - $1,300

With higher pay, having a living cost that is under 50% of your net income is easier. Now for the curveball.

What if the 50/30/20 rule isn’t enough?

A Step Above