The 50 – 20 – 30 budget rule has become increasingly popular in recent times and these numbers hold great significance in some budget theories. A company called LearnVest popularized this rule and many financial experts also say that it is a good rule of thumb to follow. The real question is, “is this budgeting rule really worth your time and money?” The answer to this question is both yes and no. This is because in the beginning, this rule can definitely offer many advantages but in the long run, it will have you astray from your aim of saving money. Every budgeting rule has its list of advantages and disadvantages and in this post, this budget rule will be thoroughly reviews along with all its pros and cons.
What exactly is the 50 – 20 – 30 budget rule?
The 50 – 20 – 30 rule, as the name suggests, will divide your money into three categories. The first category is necessities towards which, 50 per cent of your money will be allocated. These expenses include clothing, transportation, food, shelter, water, electricity, and many other necessities that are required for a basic life.
The second category is savings and payments towards debts. These can also be summed up as your financial goals. 20 per cent of your money will pay towards this. You will pay your car loan, home loan and other loans using this money. This money will also be used to add more value to your savings accounts.
Now one may get confused if car loan should be included under necessities or under financial goals since one may need a car necessarily. To clear up the confusion, you can think of down payment for the car as necessity and the money you pay later in installments to clear off the debt under financial goals.
The third category is lifestyle and flexible spending. Towards this, you will spend 30 per cent of your money. This money will allow you to enjoy your life and spend it in a more luxurious manner. This will include gyms, pets, hobbies, vacations, eating in restaurants, internet connection, cable packages, and much more.
To summarize what we discussed above, the 50 – 20 – 30 budget means you dedicate 50 per cent of your money to necessities, 20 per cent to financial priorities such as paying off debts and loans, and the remaining 30 per cent to non necessities and fun activities. This plan seems easy and effective but it comes with its own set of pros and cons. Let us discuss those:
Pros of 50 – 20 – 30 budget
The immediate advantage of the 50 – 20 – 30 budget plan is that it is a simple one which does not take much effort from your side. All you need to do is allocate your money into three buckets and keep spending according to your whims and wishes. It also helps you keep things organized since you will keep your costs fixed.
Another advantage is that you are able to spend on yourself a lot more flexibly while also saving money. Dedicating 20 per cent of your money towards debts and savings is a good way to save money, pay off debts, and also enjoy financial freedom.
Cons of 50 – 20 – 30 budget
Even though the 50 – 20 – 30 budget plan is a pretty good one and also simple to implement, it does not work in the long run. First of all, taking out 50 per cent of your money for just necessities can be a little too much since people who lean towards more minimalistic lifestyle will find that they can suffice in much smaller amount.
There are people who want to dedicate more money towards savings and will find spending 50 per cent just on food and shelter to be a little unnecessary. Many end up saving money from the first category, that is, necessities, and use it for non-necessities which discourages investing and earning profits from savings plans.
Also, since the plan dedicates more money towards financial freedom and less towards savings, it discourages people from experiencing long term benefits in favor of short term ones. These advantages may feel good for a short period of time but end up being a cause of misery later. For instance, if the 20 per cent of the money we save for debts and savings does not cover retirement savings or life insurance, the choice of either spending all the 30 per cent of the remaining money on non necessities or taking some of it out for some essential savings.
For some people, even saving 20 per cent of their money is difficult and would rather spend it on non necessities instead. There are so many different types of people in the world that the plan just does not suffice to please us all.
Is the 50 – 20 – 30 budget for you?
The real question which begs to be answered is that if the plan is for you. Maybe it is and maybe it is not – the answer depends on your lifestyle and how you see things.
Now, saving 20 per cent is a good way to start but one should definitely aim for more. Savings can help you in situations you never even imagined and one should never underestimate their value and power. 20 per cent can be a little difficult for some but a few adjustments should help you get there.
Also, you may not need 50 per cent of your money for food and other necessities so as time goes on, you can definitely decrease that amount.
All in all, the 50 – 20 – 30 plan is a good way to start but you can make things a little more detailed as you learn and time goes on.