I’ve seen a lot of articles recently about the 50/30/20 budget as a game changer in helping Americans manage their money. Unfortunately, simplistic ideas, such as fixed percentages, rarely do more than start the conversation.
50/30/20
The 50/30/20 budget provides three broad categories where you can assign your spending: 50% is for needs, 30% for wants, and 20% for investing or getting out of debt. There are web pages and calculators devoted to this budget, but in a nutshell here’s how it works:
- Take your monthly paycheck (or paychecks if you’re paid twice per month), add back in everything except taxes, Medicare, and Social Security. This is your starting point, your after-tax income.
- Multiply that number by .5 and that’s your total spend for the month for needs. Figure your monthly budget for wants (multiply after-tax by .3) and for investing/debt payments (multiply after-tax by .2).
- Categorize your spending. If it’s something that would cause a hardship if you didn’t have it (electricity, food, basic clothing) then it’s a need. If it’s something that you enjoy (cable/streaming TV, unlimited data on your phone, an expensive pair of jeans), that’s a want. The minimum payment on a credit card is a need, but anything above that would be included in 20% investing/reducing debt category (you would like to get the balance lower versus the need of making a minimum payment so it’s not affecting your credit rating or sent to collection).
A lot of work
Does this seem like a lot of work to anyone else? Splitting your cellphone bill between the bare minimum and your plan with unlimited data – can you even do that? You could look at the lowest-cost service provided by the carrier as a need, and the difference between that and your bill as a want. It all seems very complex and would require a lot of work to break down your bills between needs and wants.
Nebulous categories – it’s easy to cheat
On top of the work, the categories seem a little too malleable. What if I have a dinner party? Is that food considered a want because I have friends over versus the salad I was going to have for my family? What if work requires business casual? Maybe I can put my Friday jeans into the need category since Fridays are jeans days? What if I buy a bottle of wine when I’m at the grocery store? Need? Want?
What’s missing?
When I first read about this budget tool, I wondered where future fun stuff fit. What if you want to save up to take the kids to Disney? What about that trip to Europe? Do you take part of your wants budget and invest it (or save it) under yet another heading? Or do you use the investing category to save for your future vacations?
I live in San Francisco
If you live in a high cost area, you might dream of paying only 50% for housing, much less housing and food and utilities. Similarly, if you live in a small town (or make a ton of money), 20% might cover all your needs and then some. Does that mean you should live it up and keep investing at only 20%?
Too easy to forget the money that you don’t have
When I started this discussion, I noted that you take your paycheck and add back in any deductions that aren’t taxes, Medicare, and Social Security. You may be participating in your retirement plan or paying part of your health insurance. Yet when you add these back into the total, it’s only on paper. You don’t suddenly have these dollars in your pocket. So when you figure 50% needs, you have to go back and make health insurance one of the items listed under needs. Same with any other deductions that aren’t tax related. You have to figure out which category they would go in.
Conversation Started
This budget may work for you. And honestly if it’s gotten you thinking about budgeting, then that’s a plus. But in my mind, it’s way too complicated and inflexible.
I have a system I’ve used for years. And there are probably hundreds of budgeting ideas and tools out there. No one method works for everyone. Similarly, there are no set percentages that are right for everyone. Take some time to find a system where you are in charge of your money, and make sure it’s working for you.
Photo by Oladimeji Ajegbile