Have You Heard of the 50/30/20 Budget? It’s Bad Advice

There’s a lot of BS financial “advice” out there.

jk, I like NerdWallet

You may have heard of the 50/30/20 Budget Rule. It suggests you spend 50% of your take-home pay on needs, 30% on wants, and then contribute the remaining 20% to savings

There is one good thing about this rule: it’s simple and easy to follow. However, it has some shortcomings. We’re going to break these down and get into a simpler and more effective way to manage your money.

Why the 50/30/20 Budget Rule is Bad Advice

As I said, the 50/30/20 rule is simple, and simple is good. Nobody wants to spend all day in a spreadsheet to manage their money (well, I do, but that’s not everyone’s cup of tea). However, there are some flaws of the 50/30/20 rule to be aware of.

It Enables “Lifestyle Creep”

What is lifestyle creep? Lifestyle creep is when an individual’s standard of living increases as their discretionary income rises. Basically, as you make more, you also spend more. 

It’s definitely a positive thing to improve your standard of living, but lifestyle creep typically refers to extra “fluff”. It’s one thing to be able to afford to use your heater in the winter, but it’s another to trade in your Honda for a BMW. 

A common pitfall with lifestyle creep is that the new luxuries become necessities. 

The 50/30/20 rule enables lifestyle creep because it always says to spend 30% of your income on wants, whether you make $20k a year or $200k. Of course, if your income is lower, there are things that will be bring more happiness and more fulfillment to your life when you get a pay raise. After a certain point though, it’s just spending the money because it’s there.

Personal finance is personal, so everyone’s standards will vary. However, a study by Princeton University found that people reported increased happiness as their income rose, but only up to about $75,000. Beyond that, people earning additional income didn’t report a greater degree of happiness. 

30% of $75,000 would be $22,500. That’s definitely enough to spend on hobbies, vacations, and other things that bring you joy. Beyond that, are you really going to be happier because you have Oakleys instead of perfectly functional, generic-brand sunglasses?

Unless You Started Before You’re 30, You Won’t Be Able to Retire

Half of adults between 18 and 34 are not saving for retirement at all. However, if you were to save 20% of your income, it would be about 37 working years before you’d have enough saved for retirement. That is to say, if you’re just getting started at 35, and following the 50/30/20 rule, then you wouldn’t be able to retire until you’re 72.

The easiest solution for this is to start as soon as possible, but you can’t change the past, so the best time to start is NOW (and not follow the 50/30/20 budget). One of my previous posts breaks down how much you need to save to retire when you want and how to get started. (It might not take as long as you think!)

Just “Saving” is Worthless

So, first of all, the article I linked at the beginning that explains the 50/30/20 rule says that your 20% savings (or so they call it) can go to debt repayment. That’s not saving, it’s just spending after the fact! Now, of course, you should pay off debt as soon as possible (and then never get it again!), but to call this “savings” gives people the wrong idea. You’re not saving anything. You’re just finally catching up on money you already spent.

Now that we’ve cleared up that bullshit, we also need to mention that just saving is not enough. Once you have an emergency fund set up, you need to be investing. Here’s why.

If you make $60,000 per year, and save 20%, that would be $12,000 per year. If you just saved this in a savings account, earning a whopping 0.04% interest, you would have $362,096 after 30 years. Thanks to inflation, the real value of this money would be about half of what it is today. So your $360k, is really more like $180k.

If instead, you invested that $12,000 per year at a 7% return, which is fairly modest, you would have $1,185,837 after 30 years, more than 3 times as much!! 

Just saving is not good enough, you need to be investing. I’ll give NerdWallet some credit. They at least mentioned some of the money should go to a 401(k) or IRA, but this is after they suggested you use your savings for debt, which is just deferred spending.

So What Should I Do Instead?

You may have started to notice above that the 50/30/20 is not a one-size-fits-all. Your budgeting needs will vary depending on your income, age, and goals. Instead of coming up with some new rule, here are a couple things you want to make sure you’re doing to be financially successful.

  1. Set up an emergency fund.
  2. Avoid lifestyle creep. Even saving a $2 per hour pay raise can result in $200,000 of additional wealth.
  3. If your employer offers a retirement plan with a company match, such as a 401(k), then make sure to contribute at least enough to get the full match. This is free money.
  4. Next, or if your employer doesn’t offer such a plan, max out your annual IRA contributions.

These 4 things will put you miles ahead of your peers and on the path to Financial Liberty.

How do you budget? Let me know in the comments!

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