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The 50 30 20 budget method is a popular one, and for obvious reasons. But is it realistic?
This method is praised by many as an easy budgeting method to follow.
This was music to our ears when we started our budgeting journey.
So we decided to give it a try in an effort to get our money together and make our financial health better.
And this is how we found the 50 30 20 budget.
Table of Contents
What Is the 50 30 20 Budgeting Rule?
The 50 30 20 budget comes from the book All Your Worth: The Ultimate Lifetime Money Plan.
It’s a simple budgeting method where you split your money in three ways, 50%, 30% and 20%.
50% of your money is allocated to your needs, 30% is spent on your wants, and 20% is put aside for savings and investments.
And that’s it. Nothing too complicated, fancy or technical about it.
As a result, you can see why it’s highly popular and why we were drawn to it.
The 50 30 20 Budget In Detail
Let’s dive deeper into what this method looks like in practice.
The biggest chunk is the 50% allocation to your needs.
By needs, we’re talking about the essentials you need to live on, such as:
- Mortgage or rent
- Utility bills
- House groceries
- Transportation
- Family and pet care
- Debt repayments (minimum amounts)
Then, 30% is allocated for your wants aka your non-essentials, such as:
- TV packages (including Netflix)
- Entertainment
- Personal shopping
- Social events and eating out
- Other subscriptions like the gym or Audible
And finally, 20% is for your savings and investments, broken down as:
- Emergency fund
- Sinking fund
- Investments
- Retirement savings
- Debt repayments (overpayments)
We have designed a budgeting spreadsheet for you. It is the Ultimate Money Plan spreadsheet template with everything you need to take charge of your finances and crush your money goals.
Essentials vs Non-Essentials
This is always a sticking point for many as to what you count as essentials and non-essentials.
I see essentials as the things you either need to live on, or must pay whether you like it or not.
Non-essentials are the opposite. In other words these are things you can live without.
Non-essentials (using budgeting terminology) doesn’t mean unimportant.
I’m a musician so to me Spotify is pretty important and plays a key part in my music journey.
But if it comes to it, I can cancel the premium version and put up with the cons of the freemium.
Having an understanding of this helps to know which items in the budget can be repurposed for more urgent needs if needed.
What I Liked About This Budgeting Method
Budgeting can be scary and this method makes that first step seem less daunting.
There are a few things that I really like about this budgeting method.
Simplicity
The 50 30 20 budget is simple.
It’s so simple you can’t go wrong with it to be honest.
As long as you’re clear about what your essentials and non-essentials are, it’s straight forward.
I really like that you don’t have to overthink how you’re allocating your money in your budget.
With just three slices to cut from your pay, for your needs, wants and savings, it makes it easy to follow.
The 20% Savings Rate
I also like that it promotes a key money principle I adhere to, pay yourself first.
Putting aside 20% of your income towards savings and investments ensures you’ll build wealth in the long term.
It empowers you to stop living paycheck to paycheck and start thinking about your future.
The money habit of paying yourself first has literally changed our lives forever!
Balancing Needs And Wants
Another thing I really like is how it balances both needs and wants.
I’m not an advocate of only paying for your bills, savings the most and spending a few pennies.
This budgeting method lets you have 30% that you can spend after covering the essentials.
This means you can expect to enjoy yourself somewhat whilst repaying debts and saving.
Some make the mistake of cutting out their wants from the budget.
But one of the major benefits of budgeting is you’ll have guilt-free spending money.
However, despite all these, the things I didn’t like outweighed what I liked.
Why the 50 30 20 Budget Doesn’t Work (For Us)
As mentioned earlier, the 50 30 20 budgeting method is simple.
But this simplicity proved to be its downfall for us.
Missing Key Element
We have other financial responsibilities that fall outside of the three buckets of this method.
A very big part that was missing was charity.
We are advocates of giving a portion of our money as part of our money plan.
We believe in the power of giving.
It’s more fulfilling to give than to receive, plus we also trust in the law of reciprocity.
20% Combines Savings, Investments, Retirement…And Everything Else
Yeah, we didn’t like this.
If we were doing our savings and investments one at a time this may have worked.
But we build our savings and investments simultaneously.
This included our cash savings, such as emergency funds and sinking funds.
And our investments include our retirement and personal investment funds.
You could argue we split the 20% money across these areas.
But we like to separate the distinction between cash savings and investments.
Lifestyle Creep
But above all, this is the main reason we don’t subscribe to this method.
It promotes lifestyle creep. Hear me out on this.
In case you don’t know, lifestyle creep is when your living expenses increase as your income does.
Although this method encourages saving 20%, it says live on 50% and spend 30% of your pay.
Let’s say you use this budgeting method.
If you doubled your income, you’re encouraged to increase your living expenses according to the new income.
I’m not saying one shouldn’t spend a penny from their new increased salary.
However, our plan for our pay rise doesn’t involve increasing our living expenses immensely to maintain the 50 30 20 ratios.
Our Budgeting Method
We have built our budget to encompass these four overarching elements:
- Savings
- Investments
- Giving
- Living Expenses
Savings
As advocates of the pay yourself first habit, we put our savings and investments at the top.
We view savings as cash savings that is not invested in any assets, but are in an interest bearing account.
This is mainly our emergency fund that covers 3 months’ worth of our living expenses.
Then we have various sinking funds that cater for different needs.
We have a fund for our annual bills such as insurance premiums.
A fund for birthdays and special occasions so we can plan our spending in advance.
Plus a house fund for any major expenses or purchases we need to make.
Investments
Our investments are currently all in index funds.
We invest every month into these as we work towards our financial independence plan.
In our jobs our retirement contributions are automatically taken pre-tax prior to us getting paid.
Giving
Then we include the important factor of giving in our budget.
As Christians we give a portion of our money to our church, plus to other charities that we feel inspired to give.
You may or may not have a faith, but giving your money is honestly something you should consider.
It brings you a very different sense of joy and peace that is unique to itself.
Living Expenses
Our living expenses are categorised by type, rather than essentials and non-essentials.
For instance, we have a food category which includes groceries (essential) and takeaways (non-essentials).
This is a different strategy than the 50 30 20 method where you categorise by essentials vs non-essentials.
It made more sense for us to categorise by expense type such as household bills, transport and family care.
We are very clear about our essentials and non-essentials, but our budget is not built like that.
We have built our Ultimate Money Plan budgeting spreadsheet template to kick start you to build your own budget with.
It is a template based on our budgeting method mentioned above.
Final Thoughts
At the time of this writing, our percentage split looks like:
- Savings – 20%
- Investments – 20%
- Giving – 10%
- Living Expenses – 50%
Although it started off as the 50 30 20 method, it’s taken a different turn.
I’m not saying you should aspire to have the same percentages as ours. Ours fit our plan.
In conclusion, do what works for you.
What Will Work For You?
Despite the 50 30 20 budget being popular and praised by many, it doesn’t work for us.
It’s important you find a budget that works for you and stick to it.
Budgeting is much more than simply tracking expenses, it’s a plan for your money.
The way you build that plan will make all the difference between success and failure.
Take Action
Review your budget.
Analyse what works and what could be tweaked.
Check out our Ultimate Money Plan to get in control of your money and smash your financial goals
Let us know how you’re getting along by getting in touch with us, we’d love to hear from you
Knowledge is powerless without action
So take action, and take care
Thando