Is the 50/30/20 budget the best plan for your money?
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Not everyone likes to budget. In fact, only two in five Americans say they keep a budget, according to a 2018 study done by the National Federation for Credit Counseling.
“No one likes working on budgets,” said Dennis Nolte, certified financial planner and vice president of Seacoast Investment Services. “It always about what you can’t have, and having discipline. It’s difficult.”
The 50/30/20 budgeting plan is meant to fix this problem. Many budgeting tactics focus on making drastic cuts to save money. This plan stresses balance.
The idea was coined and popularized by U.S. Sen. Elizabeth Warren, a Democrat and presidential candidate from Massachusetts, in her 2005 book: “All Your Worth: The Ultimate Lifetime Money Plan.” Warren views her plan as a lifestyle change, like the way you would approach healthy eating: “If you don't have a master plan, then trimming a few expenses in one place while you overspend elsewhere won't do you any more good than cutting out doughnuts while you gorge on cupcakes.”
This plan has you organize your budget into three simple buckets: needs, wants and savings. You can use your paycheck to calculate how much money should go to each category.
50% of your budget goes to needs. This includes housing, food, car payments or health insurance. 30% of your budget is for wants. Wants constitute anything that’s not a necessity. This includes shopping, dining out and hobbies.
The difference between a need or want is if it’s an expense you can live without, like a Netflix subscription or gym membership, it’s a want. If cutting it out will impact your survival, it’s a “need.”
The remaining 20% goes to savings, including your retirement fund (either a 401(k) or individual retirement account) and a general savings account. (Consider opening a high-interest savings account to get the most out of your savings.) This money should also go to debt repayment, like student loans and credit card payments.
Financial professionals have mixed views.
“I’m a huge proponent of the 50/30/20 and recommend it,” Samuel Boyd, certified financial planner and senior vice president at Capital Asset Management Group, said. “It acts as a guideline for decision-making with a target for financial goals, personal goals, professional goals.”
Nolte isn’t so sure.
“30% discretionary spending is way too much and 50% on essentials is too little,” he said. “It’s popular because of who’s running for president but mostly because there seem to be few rules of thumb for budgeting.”
Nolte said the 50/30/20 plan likely appeals to younger people with fewer financial responsibilities. He recommends a more conservative approach to budgeting as one becomes older.
Whatever budget plan you adopt, it’s important to stick with it. You can always adjust it later on to fit your spending habits.
Want to try the 50/30/20 plan yourself? Download this easy budgeting spreadsheet to get started.
Image: Fabian Blank
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