The 50/30/20 Budget Rule and Why I Don’t Use It.

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Hello hello! In this post we are talking about the 50/30/20 budget rule, what it is, how it works and why I personally do not use it!

Although I don’t use this budgeting method myself, I always want to provide as much information as possible even if it doesn’t directly apply to me.

Note: Sign up for my email list to get access to my FREE resource library! Or if you don’t want to give me your email, even though I don’t spam, you can purchase the exact spreadsheet I use to track my finances at The Budget Empire.

Table of Contents

What is the Budget 50/30/20 Rule?

The idea is, you’re supposed to break out your after tax income, aka the money in your paycheck, into needs, wants and savings/debt payoff. Then allocate your expenses 50% to needs, 30% to wants and 20% to savings and debt payoff.

The idea behind this rule, created and popularized by US Senator Elizabeth Warren, is that budgeting shouldn’t be difficult. Applying this formula is easy and sticking to it will allow you to have a feasible retirement.

You can start applying this method by multiplying your monthly take home pay by these percentages. For example, if your bi-monthly paycheck is $1,500 that would be $3,000 a month.

Needs: $3,000*50% = $1,500

Wants: $3,000*30% = $900

Savings: $3,000*20% = $600

50% Needs

Needs are defined as those things you absolutely can’t live without. The items you have to pay for regardless of if you want to or not.

Rent / Mortgage
Healthcare
Groceries
Insurance
Gas
Utilities

30% Wants

Wants are obviously things you want! Those little luxuries you can enjoy.

Clothing
Eating Out
Entertainment
Travel

20% Savings or Debt Repayment

Savings and debt repayment is again pretty self explanatory.

Retirement Savings
Roth IRA
Investment Accounts
Student Loans
Car Loans
Etc.

50/20/30 Budget Rule Positives

A lot of people enjoy using this rule because it is straightforward and to the point. Additionally it is easy to follow.

It does not require a lot of math and provides you with a general framework to apply to your savings and expenses! The simplicity is to help get people to actually start thinking about their savings and retirement goals.

Why I Don’t Use the 50/20/30 Budget Rule

Simply put, if you only save 20% of your income it will take longer than 39 years to save enough money to maintain your lifestyle. I personally do not want to wait more than 39 years to retire and I don’t think the “most recommended budgeting method” should tell people this either.

I don’t want to go into another long rant about working to live rather than living to work, enjoying life and having an identity outside of work, so I’ll spare you! I’ll just talk about the math.

Let’s Do Some Math!

How did I come to this conclusion? I’m glad you asked!

Let’s take someone who makes $60,000 and applies the 50/20/30 Budget Rule. A $60,000 salary means you’re making roughly $3,624 in monthly after tax income. That would give you the below needs, wants and savings categories:

Needs: $3,624*50% = $1,812.00

Wants: $3,624*30% = $1,087.20

Savings: $3,624*20% = $724.80

Or yearly that would come out to:

Needs: $43,488*50% = $21,744.00

Wants: $43,488*30% = $13,046.40

Savings: $43,488*20% = $8,697.60

Now although you theoretically have this $60,000 salary, let’s pretend you get the minimum raise of 3% every year. Meaning in year 1 you make $60,000 and then in year 2 you make $61,800.

From there we will calculate the after tax income you would receive from those salaries, I calculated this using the SmartAssets after-tax calculator.

Next! 80% expenses (needs and wants) and 20% savings are calculated.

Lastly, based on that 20% savings, I assume a 7% investment growth rate if that money were to be invested. The average market return is 10%, however because we are factoring in a 3% inflation rate for the growth already, I only applied 7% market growth.

This number is then compounded per year. Whatever you save in the following years is added on to the original investment and the total grows by 7%.

First year:

Salary: $60,000

After-tax salary: $43,488

Expenses: $34,790.40

Savings: $8,697.60

Cumulative Investment Growth: $9,306.43

Second year:

Salary: $61,800

After-tax salary: $44,544

Expenses: $35,635.20

Savings: $8,908.80

Cumulative Investment Growth: $19,490.30

Goal of this math problem.

So you’re thinking, yup I’m following. But how do you know it takes 39 years?

I continued to do this process and calculate cumulative investment growth applying 3% salary increases and 7% market growth with a 20% savings rate until this theoretically person hit a 4% safe withdrawal rate / 25x their annual expenses.

I’ve talked about the Trinity Study before, in summary, this was a research study conducted to calculate how much money someone would have to have in retirement to sustain their current lifestyle considering their current expenses.

The research study concluded people needed 25 times their current annual expenses saved to survive during retirement. If you have this amount saved your money will be growing at a rate faster than you can spend it and faster than inflation. Aka it will last you through retirement without running out.

So with this example, I kept applying this rule and multiplying the annual expenses (inflation considered) until 25x the annual expenses was LESS than the current amount saved. When they finally hit financial independence!

As a result, this happened 39 years in. You can see this screenshot of the spreadsheet I made calculating this below.

The grain of salt.

My example is a best case scenario for several reasons. This could easily be more than 39 years.

First, my example assumes someone STARTS with a $60,000 salary. However the average salary in the U.S. is around $63,000 at the time of writing this, so it is safe to assume a college grad starting at 22 would be making less money than that.

If someone is starting out with even less salary that would extend the amount of time needed to reach this financial independence, retirement number.

Second, this example is assuming someone does not have debt. If this person were to have started with $40,000 of student loan debt, they wouldn’t have started saving until year 5, pushing back their retirement age.

However, my example could be wrong in the other direction as well! Hopefully this person is not just receiving 3% salary increases every year! They should be fighting for more! A raise they deserve and have worked hard for!

A larger salary bump would decrease the amount of time until this retirement number is hit.

Final Thoughts

I don’t want to work 39 years before retirement.

I would rather make a budget, save more money while I’m young, let compound interest take the wheel and retire ideally some time in my 40s.

How long do you want to work before retirement?

Something as simple as increasing your savings rate and being more aware of your expenses could take years off your working life. How awesome is that?

Lastly, don’t forget to join my email list and get FREE budget templates for google sheets and printables! Alternatively, purchase everything in my resource library at The Budget Empire!