Why The 50/20/30 Budgeting Rule Is Kinda Trash
A super simple approach to budgeting may be appealing, but are you setting yourself up for failure?
As someone who finds number crunching about as appealing as a yeast infection, I understand the allure of easy, round numbers. Oh, this sweater is on sale for 30 percent off? Great, I’ll take it! Oh, it’s actually 31.4 percent off in honor of Pi Day? Never mind, I’ll just wait until it goes back to full price, because I have literally no idea how much a 31.4 percent discount is.
As you might have gleaned, I am not great with budgeting. Which is why the popular 50/20/30 budgeting method makes total sense for someone like myself. Supposedly.
Since it was first introduced a few years back, it’s become a massively popular method for attempting to keep those dollar bills in the black. Here’s a brief breakdown, for the uninitiated:
- 50 percent of your take-home pay should go to “essential expenses.” This means everything that is, well, essential: Your housing costs, the food you need to eat to stay alive— different than the food you need to eat because it’s going to get you a lot of Instagram likes—utilities and transportation.
- 20 percent of your money is meant to go towards your financial obligations and priorities. This means car payments, student loans, credit card payments, retirement contributions and savings contributions.
- The remaining 30 percent is penciled in for your “lifestyle choices,” a.k.a. the fun part of your budget. This is where you factor in all your non-essential expenses like Netflix, going out to eat, building your kombucha cellar, clothing, yoga, your Glossier addiction, etc.
The idea is to parcel out your budget in that order, so that the most essential components are taken care of first, and your happy hour habit is taken care of last, all of which seems practical at a glance.
But upon further examination, the reality of how effective such a broad budgeting principle can be starts to break down a bit.
Most of the trouble lies in the vagueness of the categories, which are ripe for loose interpretation. For instance, LearnVest, the creators of the rule, suggest that your internet and cell phone bill are “lifestyle choices” rather than “essential expenses.” And while that may be technically true, for many, the internet is just as essential to our ability to earn money as transportation.
It also doesn’t take into account the vast range of rent prices across the country. As any New Yorker or San Franciscan will be quick to tell you, the idea of spending half your paycheck on rent ceases to make you wince after a while, simply because that’s a reality of living in an expensive city.
But it doesn’t change the fact that your “essential expenses” budget can be taken up by a single line item, and then what? A girl can only subsist on hardboiled eggs and chocolate soymilk for so long.
And while I’m not one to criticize financial experts that have a bit of a laissez-faire approach when it comes to disposable income, as others have pointed out, it seems a bit odd to prioritize your miscellaneous spending in the “30” category over establishing greater financial security in the “20” category.
The biggest thing to keep in mind, of course, is how intensely personal budgeting is, and how important it is to accept your own personal priorities—many of which may not align with a sweeping, loosely defined set of rules.
If you're into the 50/20/30 method, but aren't vibing on those particular ratio breakdowns, you can create your own version (the 70/20/10 perhaps?) using the Envelope Method.
Its as simple as it sounds. Once you have a personalized budget it place, create an envelop for all three (or more!) of your spending categories. Write the name of the category on the envelope and literally stuff them with cash after every paycheck. Yes, it's potentially worrisome to store cold hard cash in your home, but alternatively, the physicality of such a method could mean that you take it more seriously.
It could also mean that your more like to "cheat" on your envelopes, transferring money from one to another as the need arises. That's OK, but if you prefer a more official-looking and safer online version, there's a great budgeting app called Mvelopes with your name on it.
And speaking of apps, Mint is a favorite among the saving savvy, and online reviews of Personal Capital rate it highly as a platform for a holistic view of all your cash, and where it's going—making it easy to organize into budgeting piles that work for you.
Words: Deena Drewis