Why Sticking to a Budget of 50-30-20 Is Impractical and What You Should Do Instead

Why Sticking to a Budget of 50-30-20 Is Impractical and What You Should Do Instead

Saving Money

The 50/30/20 technique is perhaps one of the most well-known approaches to budgeting, and you may have even utilized it at some point. According to this technique, 50% of your post-tax income should go toward “needs,” while 30% should go toward “wants,” and 20% should go into savings.

On the surface, it seems to be a really decent idea, and it is an easy and uncomplicated method for organizing your money. But in 2023, this budget won’t work for the vast majority of people living in the United States.

Because of inflation and wage stagnation, the 50/30/20 formula is no longer affordable

A departure from the standard budget of 50 percent savings, 30 percent of income, and 20 percent of discretionary spending is virtually unavoidable given the rate at which prices are rising in comparison to income levels. “People have a very hard time budgeting any amount for their needs, and it is getting harder and harder for them to even contemplate savings or investments,” said Alec Pow, CEO of The Pricer. “[T]here is a disconnect between people’s wants and their ability to save or invest.”

“A recent survey we performed with our visitor base indicated that most individuals are presently spending upward of 70% of their overall income on basic essentials, which leaves a very tiny fraction to be divided between debt, investments and superfluous expenses.”

The 50/30/20 has been successful for certain individuals, particularly in previous years when the cost of living was lower; nevertheless, it is particularly unworkable for low-income Americans and those who reside in costly places such as San Francisco or New York. There, it is very difficult to obtain a rent or mortgage that costs less than half of your monthly take-home pay.

Some authorities maintain that the 50/30/20 rule is not useful in any way

“This budget is quite limited, and it does not take into account your beliefs, lifestyle, or financial objectives in any way. Those who live in regions with high costs of living, for instance, will find that allocating just 50 percent of their income to meeting their basic requirements is insufficient. According to Maria Victoria Colón, CPA, money coach, and the person responsible for starting the social media movement known as @dineroenspanglish, “twenty percent for savings is not enough for individuals who are seeking financial independence and early retirement.”

“The trouble with the 50/30/20 budget is that it implies some fairly strange ratios for spending,” DontPayFull co-founder and CEO Andrei Vasilescu said further. Thirty percent is a pretty significant amount to allocate to unnecessary personal spending, and right now, that just is not viable.”

Alternatives to the Standard Budget of 50-30-20

If the 50/30/20 budget was previously regarded the budgeting industry’s gold standard, that status has since been revoked. However, there are other approaches to budgeting that might assist you in achieving your monetary objectives. The following are some alternatives to the 50/30/20 that are endorsed by industry professionals.

The Method of the Envelope

People who learn best via seeing things done function well with the envelope approach, as do those who find it more convenient to have cash on hand.

“You will need three to five envelopes, and you will label the outside of each one with the purpose it serves. According to Mike Toney, the financial director of Car Donation Centers, “Place the cash you want to spend, both physically and online, in each envelope for the month, and only spend that money on those items.” You may do this both offline and online.

“Seeing where your money is going might help you keep to a budget a bit better.”

The 80/20 Plan Financial

The 80/20 budget is another kind of percentage-based budgeting that divides money into two major categories. This type of budget may be more suitable for those who do not want to evaluate every single purchase they make.

“The 80/20 strategy simplifies things to the point where the 50/30/20 rule and the envelope method become too complex. You may avoid the hassle of sorting each and every cost into those that are necessary and those that are not by diverting twenty percent of each paycheck into a savings account instead. David Scott, the founder and CEO of Top Reviews, claimed that the remainder is free for the customer to spend anyway they see fit.

The Budget Based on 70/20/10

This budget is structured in the same manner as the 50/30/20, but the percentages have been modified so that they are more appropriate for the financial circumstances of the typical American.

“The 70/20/10 rule recommends allocating 70% of your income to spending on necessities and discretionary items, 20% of your income to savings, and 10% of your income to reducing or eliminating debt. This strategy is reflective of the fact that consumers’ buying power as a whole has decreased, as well as the increased prevalence of debt among regular consumers. According to Brian Dechesare, the creator of Breaking Into Wall Street, one of the advantages of this option is that it motivates us to maintain our savings rate of at least twenty percent of our income. This rate is critical to ensuring our long-term financial stability.

If you do not have any outstanding debt, you have the option of allocating the 10% category to anything else, such as savings for future trips, charitable contributions, or investments.

Budgeting starting from zero

A hands-on budgeter or someone who believes that adopting a hands-on approach would be beneficial for them with their money is the ideal candidate for zero-based budgeting (spoiler alert: it usually does).

Rule number one in terms of managing one’s finances is to give each and every dollar of revenue a function.

According to Stacy Mastrolia, MBA, PhD, associate professor of accounting at the Freeman College of Management at Bucknell University, “Using this method, take-home pay is first allocated to needs, with the remainder being allocated to wants, savings, and paying off debt until all of the income is spent,”

“The zero-based budgeting system focuses attention on the amount spent on each budget line item; encouraging families to budget realistic amounts for each category reflecting real-time increases (or decreases) in pricing; and forcing adjustments to other lines of the budget to maintain the zero balance.” [Citation needed] “The zero-based budgeting system focuses attention on the amount spent on each budget line item.”

The greatest benefits of using a zero-based budget are its adaptability — you can make changes to it whenever you want — and the fact that it takes into account the “personal” aspect of financial planning for individuals. Nobody but you can identify the most effective method for budgeting your funds, however.

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