5 Problems With the 50/30/20 Budget

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You're better off creating a custom budget tailored to you.

If you've ever searched "how to create a budget," you've probably come across the 50/30/20 rule, popularized by Senator and presidential hopeful Elizabeth Warren. It's appealing because of its simplicity: You take your after-tax dollars every month and divide them up like this:

  • 50% on needs (housing, food, insurance, utilities, minimum payments on bills, etc.)
  • 30% on wants (new clothes, trips, concert tickets, night on the town, etc.)
  • 20% on savings (retirement, debt repayment beyond the minimum, home down payment, etc.)

It sounds great in theory, especially getting to spend 30% of your money on whatever you want. But in practice, it doesn't always work as well as you might hope. Here are five of the most common problems with the 50/30/20 budget.

1. Low-income individuals might need more than 50% of their income for needs

Low-income households, especially those in expensive cities, might have to spend more than 50% of their after-tax earnings on needs. You could try shopping around for cheaper rates on essentials or seeking out more affordable housing. But if you're like a lot of these households, you'll already have trimmed your budgets as far as you can -- and still spend more than half your income on basic necessities.

This can prohibit saving for long-term goals or even building up an emergency fund to help cover unplanned expenses. Many of these households also have to skip a lot of their wants because they cannot afford to spend money on frivolous things.

2. It encourages wasteful spending among high-income households

If you make $10,000 per month, the 50/30/20 budget says you can spend up to $5,000 on basic living expenses and another $3,000 on whatever you want. Huge mansions and trips on private yachts anyone? Hopefully, you wouldn't do this, but the way the 50/30/20 budget is set up, it can cause high-income individuals to spend a lot of money on things that they don't need and not save enough for important financial goals. More on that below.

3. You might need to save more than 20% of your income to reach your goals

Saving 20% of your income might sound like a lot of money, but it isn't always enough, especially if you have a deadline for one or more of your savings goals. If you know when you want to retire, for example, you have to save a certain amount per month to make that happen. That amount could be more than 20%. Similarly, if you plan to buy a new house and you want to have a down payment by the end of the year, you'll probably have to set aside more than 20% of your income. 

Some argue that even if you don't have a deadline, it just isn't smart to save 20% of your income while spending 30% on discretionary purchases. If you feel this way, you can try flipping the last two categories and saving 30% of your income and spending the remaining 20% on your wants.

4. It slows your progress when you have multiple savings goals

When you have multiple savings goals you're working on simultaneously, it's going to take you longer to save for each of them. That's true of any budget, but it's a more significant problem if you're serious about adhering to the 50/30/20 model. If you're limiting yourself to only 20% of your income, you might feel frustrated about how slowly you're progressing toward each of your goals.

5. It doesn't tell you what to do with any extra money

The 50/30/20 budget doesn't give you any guidance about what to do if you don't spend 50% of your income on needs or the full 30% on wants. You're free to decide this for yourself. You could choose to spend a little of your extra needs money on wants or put the extra money into your savings account. There really isn't a wrong answer here, but some people might prefer a tailored budget that helps them track where every dollar is supposed to go.

How to build a better budget

You can use the 50/30/20 budget as a starting point, but you should tailor your final budget to your lifestyle. First, make a list of all your essential living expenses, however much those might be. If you'd like, you can look for ways to reduce those expenses, like moving to a more affordable area or shopping around for more affordable insurance, but this might not be possible for everyone. 

Once you know how much your needs are going to cost, subtract this from your monthly income and then decide how you're going to divide up the rest. You should prioritize savings over discretionary spending and you should also prioritize each of your savings goals so you know what order to save for them in. Your emergency fund should be first if you don't already have one. Debt repayment and retirement are good secondary goals. After that come things like a down payment for a home or car. If some of your savings goals have a deadline, figure out how much you have to save per month to reach that goal and aim to set aside this much every month.

Use whatever is left over every month for discretionary spending. You may want a separate bank account to keep these funds so you don't confuse them with your needs or savings. If you don't end up with anything left over, you might need to cut back on your savings to allow yourself a little fun money. You're less likely to stick with your budget long term if you don't ever get to do anything you enjoy. 

You might not get your budget right the first time. Check in every month to see if you need to make any changes. You may realize you need to allot more for groceries than you thought you'd need. You may also need to make some changes to your savings timeline if you realize you can't save as much as you'd hoped each month. 

The 50/30/20 budget, like any cookie-cutter budget, is flawed because everyone's situation is unique. Creating a custom budget based on your income, savings goals, and spending habits is the only way to ensure that you're making the best possible use of your money.

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