Why the 50/20/30 rule is ridiculous

There is a rule floating around the interwebs that says you should organize your finances according to the 50/20/30 rule. Essentially, your fixed expenses should total 50% of your take-home pay, 20% should go to savings/investments and the 30% left over is for discretionary spending.

That sounds pretty stupid to me, because as I’ve said before, percentages mean nothing except in relation to an integer.

Let’s say you’re a recent grad making minimum wage. In the U.S., that’s $7.25 ($9.32 here in lovely Washington state, but let’s go with the low number). If you work 40 hours a week, and are single with no dependents, that’s $13,500 in after-tax money a year, or $1125 a month.

Half of that is $562.50. That’s what you have, by the rule, to spend on rent and bills. Pretty tight, and probably near impossible in places like NYC, but do-able in many smaller cities. You find a cheap place with roommates, get a low-cost cell phone, and are super frugal with your grocery buying. It’s tough, but you make it work. You then, by this rule, have $225/month to save (or pay off things like student loans) and $337.5 ($84/week – seems high to me, and if this was my budget, I’d probably move $100 of that to food and living expenses, but to each their own) to have fun with. You are financially content in this situation, but it’s tough.

You work there for a while, gain some skills, and move on to a job paying $35,000/year, so your take-home pay nearly doubles. Go, you! Wanting to be smart with this new windfall, you start recalculating based on the 50/20/30 rule.

Your new budget categories are: necessities: $1125, savings/debt payoff: $450, discretionary fun money: $675.

Wow! You can move into a way nicer apartment, get a fancy cell phone, go out to eat every day, and save twice as much money! You could buy a car! Cool!

Or, you could … not.

Let’s say instead you move into a slightly nicer place and get a fancy cell phone. Maybe up your monthly necessities to $800 (remember though, these aren’t really necessities, this is a lifestyle inflation you’re choosing, and you survived perfectly well on less), so now they’re 32% of this new fancy salary you have. Give yourself a little more fun money, maybe $400 a month, or 16% of your paycheck.

Wow! You’ve increased your spending and you’re still saving 52 PERCENT OF YOUR PAYCHECK.

Damn, you’re impressive.

That’s $1300/month, or $15,600/year. That’s money you’ll have in the bank to fly home for a family emergency, or spend as a down payment on a home in a couple years, or see you through a period of unemployment, or invest as an awesome start to an impressive net worth.

Imagine you get a raise, or another new job, in a year or two, and now you’re bringing home $3000/month. But you are already living a life you’re happy with, so you just stick that extra $500/month in your savings too. It’s not like you need it to be happy.

All of this is a long way of saying, letting your income determine your spending is ridiculous. Just because you’re saving 20% of your paycheck does not mean you “deserve” to spend whatever is left over on Chipotle and movies and a small pile of new clothes every month.

Your spending should be determined by what it takes to live a comfortable life, probably with a few luxuries (I go to bars/restaurants 2-3 times a week. It’s not like I live in a cave). Coming in $100 under on your discretionary budget on the 29th isn’t a reason to go see what’s on sale at Target, it’s an opportunity to chuck that $100 in your savings account, where it can do way more good for your future than that motivational poster, sweater and video game ever will.

Note: Yes, I realize there are people supporting whole families on minimum wage. There are people whose budget is already cut to the bone, and still they’re struggling to get by. This post is not directed at those people. This post is directed primarily at my fellow post-grads, who suddenly find themselves with salaries and more money than they’ve ever had, but are hemorrhaging it away instead of being smart about it.

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7 thoughts on “Why the 50/20/30 rule is ridiculous

  1. ricodilello says:

    You would be surprised at the number of people that spend more than they make. There are lots of advisors that use different rules to get their clients on track to reaching financial goals. The 50/20/30 rule doesn’t work for the average person. There is no point in saving 20% of your income if you have $30,000 worth of student loans or mounds of credit card debt. If you want to retire at 47 then set that as a goal, get rid of all debt and then start saving. Put your saving to work earning money so that you no longer need to work.

    Liked by 2 people

  2. Tim M says:

    I think you are absolutely right that using a generic thumb rule to drive your finances is not a good idea.

    I am in the middle ground as far as the order in which I would set my financial goals if I were young and starting over. I would:

    1. Establish my emergency savings. Having an emergency savings account will help you to avoid turning to credit cards and more debt when life throws you a curve ball…and it will.

    2. Max out my employer’s contribution to my 401k. Don’t leave free money on the table.

    3. Pay off my debts. Pay highest interest rate debts first. This means low interest student loans would be a lower priority than high interest credit cards.

    4. Grow my 401k, Roth, and other investments. For long term investments, I would stick to index funds.

    If I was a fresh graduate from university and my job location would allow it, I would strongly consider spending two years under my parent’s roof. If they would agree to it, I would be able to get a two year head start on my plan with a minimum of living expenses.

    Liked by 1 person

  3. Kevin says:

    Use your critical thinking skills…50-20-30 is a concept a guideline not a hard and fast rule…it is targeted at the over spenders who live paycheck to paycheck (by choice) …it should be a minimum goal to save 20% but clearly based on your circumstances you should strive for more…and it is targeted to include the post grads that you describe because they know exactly what to do with it SPEND IT

    Like

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