Revisiting the 50/20/30 Budgeting Rule

by Jessica Sommerfield · 5 comments

budgeting rules
There are dozens of choices when it comes to budget plans. If you’re still looking, or are completely new to the concept of budgeting, let me re-introduce you to an age-old budgeting guideline: the 50/20/30 rule. Even though it’s a classic, it bears a fresh look, especially through the lens of the modern American’s financial outlook.

Three Categories and What They Contain

The 50/20/30 rule splits up take-home pay into three large spending categories — fixed costs, financial goals, and flexible spending. Here’s a list of what each contains.

  • Fixed Costs (50%) – These are the expenses most vital to your survival, which don’t vary from month to month: mortgage, rent, vehicle payment and utilities. Some versions also include non-essential monthly subscriptions, since they require a monthly commitment and the amount doesn’t vary unless you choose to discontinue them.
  • Financial Goals (20%) – This category includes any monthly payments and contributions toward improved financial health: 401K and other retirement accounts (from post-taxed income), extra payments on credit card debt or student loans, building an emergency fund, and savings goals such as a down payment for a home or funding an education.
  • Flexible Spending (30%) – This category includes expenses that vary from month to month: groceries, gas, eating out, shopping, hobbies and entertainment.

Some Pros, Some Cons

One of the best traits of the 50/20/30 guideline is its simplicity. There aren’t dozens of categories to micromanage, but it will still get the job done. This is a great starting point for everyone, especially if you’ve never stopped to look at the bigger picture of your spending balance.

Nonetheless, the plan may not work for everyone. Keeping fixed costs under 50% and saving 20% might be unreachable to many people in their present circumstances. On the other hand, some advisors think the plan should be more like 50/30/20 – saving more and leaving less for flexible spending. For that matter, choosing a more minimalist approach to living (smaller house, older cars) can reduce fixed costs well below 50%, especially among those with higher-than-average incomes. However you choose to view it, the 50/20/30 rule is best described not as a strict budget, but a helpful guideline. 

budgeting ruleHow to Use 50/20/30 in Today’s Financial Landscape

Reduce Your Fixed Costs
Financial experts recommend your fixed living costs not exceed 50% of your income, but — thanks to huge mortgages, multiple vehicles, and skyrocketing rent — many Americans will find themselves over this amount. Know what percentage of your income is consumed by fixed expenses, then identify ways to reduce them: refinance your home, negotiate lower interest rates, or choose not to buy new vehicles every few years. If you include subscriptions in this category, see how many can be reduced or eliminated – magazines, movie clubs, cable or satellite, Internet, data plans, gym memberships.

Look for Ways to Spend More on Your Financial Goals

Reducing your fixed costs will allow you to designate more income toward your savings and other financial goals. Maybe you’re barely saving 5% right now, but even small changes can make a difference. In our debt-burdened society, it can also be difficult to choose between paying off debt and saving for retirement, especially when you’re young and retirement is still far away. Remember that the more you contribute to retirement accounts when you’re young (both pre and post-tax), the more it will compound (that also goes for high-yield savings accounts). Even if your current focus is debt, continue to contribute as much as you can to retirement and savings. When you eliminate bad debt, use former payment funds to increase your retirement and savings contributions.

Be More Controlling with Flexible Spending

You may never be able to completely predict all the categories under flex spending, but the more you can control, the closer you’ll get to flip-flopping that 30% with 20% and save more for future goals by spending less on immediate wants. Try limiting how much you eat out or go to the movies, and take advantage of rewards cards, fuel points, coupons, and rebates to reduce your grocery and gas bill on a regular basis.

It may be basic, but if you follow these tips, the 50/20/30 rule might just be the tool that helps you get out of debt and improve your financial outlook for good.

Here’s Another Approach – An Expense-Directed Budget

Everyone is different, so you may find it helpful to follow a stricter cash-only or “bare-bones” budget to get your finances back on track. It’s called “personal” finance for a reason — no two budgets will look alike.

You still have to determine income on this type of budgeting system though. While this step teaches shows you how to live within your means and avoid creating debt, the focus tends to be on cutting costs. In other words, putting your finances on a diet.

And let’s face it — nobody likes to diet, even if it’s for their own good. Our relationship with money does require a measure of discipline, but if that’s the only way we view the partnership, it can be hard to stick to the plan, just as it gets hard to cut calories or certain foods for any length of time (how’s that New Year’s resolution going?). That’s why many nutritionists and trainers recommend leaving behind the “diet mentality” and its restrictive ways for another approach: learning to enjoy new foods, eating mindfully, and focusing on the end goal of what we’d like our health and fitness to be.

With budgeting, you can adopt the same approach by first determining what you want your budget to look like instead of what your current income dictates.

It’s difficult to see how this works unless you write it out. The goal isn’t to make everything fit within a certain amount, so set aside your income for the moment and just write down the expense and savings categories and amounts you want to be there. Then look at your monthly income. What’s the difference between that amount and your “ideal” expenses? Is it a few hundred dollars, or a few thousand? What could you do, realistically, to bring in more income and bridge that gap?

The key advantage of this approach is that it’s motivating and empowering. Instead of always focusing on cutting money, it shifts the focus to making money, with the purpose of reaching our goals and living in alignment with our core values — the ultimate financial motivators.

There are, of course, a few words of caution. If the ideal, expense-directed budget exceeds our current income, it’s not an excuse to live beyond our means. Secondly, if it doesn’t include an appropriate level of savings (wisely, 20%), it could quickly lead to lifestyle inflation. And neither is good for our financial health.

Consider using the expense-directed approach to do a little vision casting for this coming year. Maybe it will be just the motivation you need to purpose a fun side job, ask for a deserving raise, or start looking for the position or career that’s a better fit for you.

What’s your approach to budgeting, and how does it affect your motivation and outlook?

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{ read the comments below or add one }

  • Zakuan says:

    I really like this method but I’m doing it using my gross income + other allowances + others. btw thanks a lot.

  • Stephen says:

    I eagerly await the day I can follow this rule… sadly my ‘fixed costs’ are taking up a bit more than 50% at the moment :/

  • Myfinancekits says:

    I like the 50/20/30 approach to budgeting. However, if I want to apply it, my own ratio may be slightly different but the principle will still hold the same. For example, someone who does not have huge monthly mortgage repayment to make may have something like 45/20/35.
    Thank you for the enlightenment.

  • Allan @practicalsaver says:

    I like this rule. If you are looking for a basic, not so over-the-top type of budget, this 50/20/30 is a good start.

    On the other hand, You are right when you say that it may be hard to follow this rule especially when you are talking about mortgage, car payments, and things like that. They may not be small or really big, but when you add up all these fixed costs, you’ll see that they get the big portion of the pie.

    Personally, I don’t follow this rule or any other rule. What I do follow is that I pay myself first. From there, I figure out what I need to pay first, then, second, etc. Of course when I first started doing this, I had to make sure I knew all my fixed costs and variable costs. Once I got that done, I knew exactly how much I will have in savings after all expenses are taken out.

    Once I knew that, I backtracked and reverse the scenario. Since I know how much I will save, I always take that out of my paycheck right away and then, the fixed costs. Whatever is leftover is dedicated for miscellaneous expenses. Sometimes, my miscellaneous is 10% and other times below or above that 10%. It just depends on how much my fixed costs are. That’s right some of my fixed costs aren’t really fixed (i.e. water, sewer, and electricity).

    • David @ says:

      Paying yourself first is so simple, yet it’s perhaps one of the most powerful way to save. If you can automate savings, then you will eventually become rich. It’s as simple as that.

      Thanks for sharing your strategy Allan!

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