Budgeting is a great and simple way to keep a tab on your finances. It helps you know where your money goes so that you don’t have to worry or panic after checking your bank balance. One of the most-commonly adopted budgeting strategies is the 50-30-20 rule. This budgeting rule was popularized by Senator and presidential hopeful Elizabeth Warren. 

If you are unaware of it, the 50-20-30 rule is a simple method of how to split your monthly paycheck after separating the tax dollars. According to the 50-30-20 budgeting rule,

  • 50% of the paycheck should go to needs. These include your monthly bills, rent, transportation expenses, food, insurance, and others.
  • 30% for your wants. These include your lifestyle choices like your electronic gadgets, new clothes, vacations, OTT subscriptions, dining out, movies, and others.
  • 20% for savings or getting out of debt (if you have any).

In this way, you have defined brackets for everything, and you won’t likely go overboard with your spending.

Many people swear by this money-saving rule and they might be right in their stand. But, the 50-30-20 rule is not perfect and doesn’t fit everyone perfectly. Some people can, in fact, face negative consequences when following the 50-30-20 rule.

In this article, we take a look at the fallacies and try to debunk the 50-30-20 rule myth.

Why is the 50-30-20 Rule a Total Myth?

  1. It Doesn’t Consider an Individual’s Circumstances

The 50-30-20 budgeting rule considers every person’s financial circumstances to be the same overall. It has a one-size-fits-all approach but, in reality, this is far from the truth.

For example, the rule says that individuals should allocate 50% of their paycheck for needs. But, the needs of two different persons are never the same. One person might need to spend just two thousand dollars while the other might need to spend five thousand on their needs. 

Similarly, the first person might have a high paycheck, whereas the other person might have a substantially low paycheck. Thus, when it comes to personal finance and budgeting, avoid following the 50-30-20 rule diligently. 

As reliable finance and budgeting advisors like Chunk Finance stated, you should create a budget according to your lifestyle. Thus, it is best to seek help from financial managers or just simply use comprehensive financial platforms to access your financial information.

They will provide you with personalized budgeting tips and advice based on your unique financial situation. Thus, you will be guaranteed that your finances are handled in the best possible way.

  1. It Doesn’t Allocate Your Finances Properly

At first glance, the 50-30-20 ratio seems like the perfect way to split your needs, wants, and savings. But, if you take a closer look, the ratio is flawed. For example, the 50-30-20 rule states that you need to allocate 30% of your paycheck for your wants. This is rather a large number for things you don’t necessarily require.

Suppose you earn $2000 a month. Then, spending $600 on your wants doesn’t make sense. Similarly, the rule allocates only 20% of your income for savings purposes. This percentage can be low for many individuals.

Thus, instead of following the 50-30-20 rule to the T, do your own research and determine the amount that you find fit for spending and savings. One of the easiest ways to rethink your spending vs. savings is to allocate 30% to savings and 20% to your spending. This small adjustment will make a huge difference over time.

  1. It Doesn’t Prioritize Debt Repayment

As unfortunate as it may sound, many individuals are under one form of debt or another. This includes money borrowed from friends and family or loans taken from banks.

If you are in debt, you would want to pay it off as soon as you can. The 50-30-20 budgeting rule, however, restricts how quickly you can complete your debt repayment.

Only 50% of your earnings is allocated for your wants, including debt repayment. If you consider other essential expenses like your home rent, electricity bills, groceries, and others, you will be left with very little for repaying your debt. Thus, it is important to vary your needs percentage if you are in debt.

  1. Confusion Between Needs and Wants

Some of the expenses might look like a need, but they can fall in the wants bracket after detailed thought and vice versa. Thus, it can become difficult to pinpoint what exactly is a need or a want.

For example, a high-speed internet connection costing $100 monthly can look like a want. However, if your professional work depends largely on the internet, then the internet connection can be easily termed as a need.

Thus, determine what every spending means to you. Allocate them in the correct category and be consistent with your approach.

  1. It Doesn’t Tell You What to Do With the Extra Money

You don’t necessarily end up utilizing every penny set aside for your needs and wants. You always have a few extra dollars here and there.

The 50-30-20 rule doesn’t tell you what exactly to do with the extra money. For example, if you have additional money from your needs, does it go to your wants, or do you need to save it? The 50-30-20 rule doesn’t tell you this.

Some people might put the extra money in savings, while some might spend it on a movie or an iPhone. There isn’t a clear right or wrong answer here. What you do with the surplus is your choice.

But, most people would like to have a tailored budget where they know exactly where every dollar goes.

Key Takeaways

The 50-30-20 rule can be a great way to handle your expenses and savings. But, as we have seen, the rule has several shortcomings. You should not follow the rule strictly as stated. Rather, you can make minor adjustments based on your current financial situation and future goals.

Moreover, you can also try out different budgeting approaches rather than sticking to the 50-30-20 rule. You can choose the one which suits you the best.

The budgeting strategy that you go with should help you achieve your financial goals easily. It should help you develop healthy spending habits and increase your savings regularly.