There are literally dozens of tips on how you should allocate your budget, and most of them advocate deferred gratification in favor of big savings. However, United States senator and bankruptcy expert Elizabeth Warren went against the grain and gave people a new way to budget their monthly income: the 50-30-20 rule. The idea earned praises and drew flak alike. With so much buzz around this new rule, how does 50-20-30 work? And is this the right type of budget scheme for you?
What is the 50-30-20-budget rule?
In the book All Your Worth: The Ultimate Lifetime Money Plan, Warren came up with an allocation that would both satisfy a person’s desire to save money and satisfaction through wants. According to Warren, this is a practical formula that can address a person’s financial issues with the right balance:
- 50% of a person’s net income should go to basic necessities
- 30% of a person’s net income should go to lifestyle expenses
- 20% of a person’s net income should go to financial priorities
With this formula, a person can create a balance between the needs and wants without sacrificing the necessary expenses such as food, utilities, and other basic needs.
Wants and needs: what’s the difference?
There have been countless debates regarding the difference between the two, making it harder for people to differentiate needs from wants. However, the hairline that separates the necessities (needs) from lifestyle) wants is simple: if you take away something and it drastically affects your daily activities, then it is a need. If an item or service can be described as discretionary, it is automatically classified as a want.
For instance, utilities like water and electricity are necessities because they can cause severe inconvenience and affect the quality of our daily lives. Meanwhile, things like cable TV connection and new shoes will not impact our everyday living, making them automatically wants.
What are the advantages of the 50-30-20 rule?
The problem with other saving formulas is that they strongly discourage you from spending for your wants. While you may be able to save more from deferring your gratification, unchecked urges will one day puncture your wallet in the most unexpected ways. Among the advantages of the 50-30-20 rule over other budgeting methods are the following:
- Fixed basic expenses. Since the rule encourages you to keep your basic expenses at 50% of your income, it allows you to live within your means.
- Secure monthly savings. While this budgeting method allocates only one-fifth of your monthly budget, the consistency of the savings will compensate for the relatively low amount.
- Flexible spending. The 30 percent allocated to optional expenses provide you with leeway for unexpected or discretional spending. Whether you need to bump up your groceries for the month or just want to watch a movie, there will always be budget for you.
In the end, it is up to you whether or not this budgeting scheme will benefit you. While the 50-30-20 rule may not be for everyone, this new perspective on allocating monthly budget teaches us new things on how to handle money.