A popular budgeting approach that was outlined by Senator Elizabeth Warren in All Your Worth: The Ultimate Lifetime Money Plan, a book about personal finance, the 50-30-20 rule has long been touted as an ideal way to handle a household’s money. However, determining whether it’s still a good fit today isn’t always easy at a glance. If you’re asking yourself, “Does the 50-30-20 rule still apply in 2022?” here’s what you need to know.
The 50-30-20 Rule: An Overview
As mentioned above, the 50-30-20 rule is a budgeting technique that’s designed with simplicity in mind. The basics of the strategy involve spending no more than 50 percent of your after-tax income on needs. Then, 20 percent goes to savings, and the remaining 30 percent can go toward wants.
Usually, needs are characterized as household necessities. This includes your rent or mortgage, transportation expenses, groceries, utilities, and insurance. However, it also incorporates other debt payments, as staying on top of your bills is essential.
In the wants category, you’ll find optional expenses. Entertainment spending – including dining out – falls here. The same goes for funds directed toward hobbies, recreational travel, and certain purchases.
The savings category includes everything from an emergency fund to retirement account contributions. However, money set aside for purchases in the wants category doesn’t qualify. Instead, only savings with certain financial security-related goals is typically part of this category.
However, extra debt repayments beyond the minimum can count as savings. Reducing a debt – particularly a high-interest one – does improve your financial standing and can result in financial gain, allowing you to reduce the total amount of interest paid.
The Pros and Cons of the 50-30-20 Rule
There are several pros and cons to the 50-30-20 rule. When it comes to benefits, the biggest is simplicity. It’s incredibly easy to determine where your money should be allocated, making it a solid starting point for those who are new to budgeting.
When it comes to wants, the 50-30-20 rule is also pretty generous. It can help you make sure you’re not depriving yourself, as part of your money is designated for optional spending.
The 50-30-20 rule also encourages you to keep your fixed, unavoidable costs down. Capping the necessities at 50 percent can help keep you out of financial trouble and gives you a solid limit to follow to increase your odds of long-term monetary health.
When it comes to drawbacks, the most significant is that the 50-30-20 rule might not work for low-income households. In some cases, capping your necessities at 50 percent isn’t practical if you don’t have a strong salary, and that can be discouraging.
Another issue is that debt repayment isn’t a priority. Since high-interest debt can be catastrophic if left unchecked, the lack of focus on managing it isn’t ideal.
In some cases, there’s some haziness about what is a need and what is a want, potentially causing households to miscategorize spending. Plus, allocating 30 percent to wants could encourage you to spend money on things you’d be better off skipping.
Finally, one could argue that drawing a line in the sand on savings isn’t ideal. While setting aside 20 percent is admirable, dedicating more could be a necessity if you want to achieve financial independence or retire early.
Does the 50-30-20 Rule Still Apply in 2022?
Technically, the 50-30-20 rule can still apply in 2022. Recommending that households send 20 percent of their income toward savings goals isn’t a bad guideline, as it could provide a significant amount of financial security.
Plus, capping fixed expenses at 50 percent is a wise move. Since that includes debt repayments, it prevents households from overextension, which is beneficial.
The main issue isn’t whether the 50-30-20 rule applies in 2022; it’s whether it’s right for a particular household. For low-income ones, the 50-30-20 rule may not be realistic, particularly when it comes to restricting spending on genuine needs and allocating that much toward savings. In some cases, a household may commit far more to necessities, leaving almost nothing for wants, emergency funds, and similar expenses.
Additionally, if your household carries high-interest debt, the 50-30-20 rule doesn’t prioritize paying that down. Instead, it mainly focuses on making minimum payments – putting that into the need category – and considers extra payments a form of savings, digging into what a household might set aside.
The 50-30-20 Rule Still Has Merit
Still, the 50-30-20 rule does have merit. It’s a great framework for creating a basic budget, giving households a solid starting point that can lead them to financial wellness. However, tweaking it may be a necessity.
Households should factor in the impact of their high-interest debt and, if possible, consider paying that down a need and a want, not an optional form of savings. That way, they’re allocating a full 20 percent toward other efforts that boost financial security, such as an emergency fund and retirement contributions.
Every household should review their spending levels, determining how much of their income is going to the three categories. Then, they can factor in their high-interest debts. In many cases, reducing both needs and wants, putting them below the 50 and 30 percent thresholds, respectively, makes financial freedom easier to achieve. As a result, it’s an approach worth considering.
Do you think that the 50-30-20 rule still applies in 2022? Why or why not? Is there another approach that you feel is a better fit? Share your thoughts in the comments below.
Read More:
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Tamila McDonald is a U.S. Army veteran with 20 years of service, including five years as a military financial advisor. After retiring from the Army, she spent eight years as an AFCPE-certified personal financial advisor for wounded warriors and their families. Now she writes about personal finance and benefits programs for numerous financial websites.
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