50 30 20 Rule – The 50 30 20 Budgeting Method Explained
Want to know more about how the 50 30 20 Rule can save you money? Keep Reading!
Money plays a huge role in everybody’s life. The fact is that most people don’t believe they have enough or make enough to be financially stable. While it is true that money is needed in life, it doesn’t mean that it is everything. Truthfully, many people have more than enough money to survive but they don’t know how to manage it. This is where a financial tool known as the 50 30 20 Budgeting Method can help them out. The following information can explain what the 50 30 20 Budgeting Method is and how it could possibly improve their financial future.
What is budgeting?
Before we take a look at this particular budgeting plan, we first must discover what a budget is. In the financial sense, a budget is a financial plan that has been created for the purpose of controlling finances. Budgets are made to manage (and categorize) a person’s expenses. Financial budgets ensure that people are accomplishing goals with their money and using it in the right way. The 50 30 20 Budget Method is for this purpose.
How did the 50 30 20 Rule begin?
A 2020 Democratic presidential candidate by the name of senator Elizabeth Warren came up with the 50 30 20 Budgeting Method. Elizabeth Warren is not just a Democratic presidential contender, but she is also the senator of Massachusetts. Warren wrote a book back in 2006 titled “All Your Worth: The Ultimate Lifetime Money Plan”. She co-authored this non-fiction manuscript with her daughter Amelia Warren Tyagi.
This mother and daughter duo had been writing financial books for years. They came up with the 50 30 20 Budgeting Method from their many years of financial experience. Ultimately, Warren and her daughter want people to know that they can live their best financial lives now. They can improve their financial net worth and have the things they need life while enjoying some of life’s pleasures.
How does the 50 30 20 Rule work?
Warren and her daughter Amelia provided a plan for their budgeting method. They simply state that the plan works by dividing up a person’s after-tax income or their net pay. This is the money people get once their gross pay. A person’s gross pay is the money they receive before taxes are taken out.
Once a person receives their net pay, they should divide it up into 3 categories. According to Warren and Amelia, the 3 categories are needs, wants, and savings. The two authors say that 50% of a person’s net pay should go toward their needs. They then tell people that 30% of their net pay should go toward their wants, and 20% of their net pay should be used for savings.
This method is designed to provide people with money to cover their bills, to have the things they need in life, and to put money away for the future and for emergencies. On the surface, this budgeting plan might seem practical. However, it is not always beneficial for everyone to use. We’ll get to that in a minute. First, let’s take a look at the good things that this budgeting plan can provide.
The 50 30 20 Rule Pros…
One of the best benefits of this budgeting system is that it will help a person to cover their living expenses while allowing them to buy the things they want. It will also give them the ability to put money away or to use it for investing.
People who can use half of their income to cover their living expenses are usually in financial good shape. If a person has this type of financial ability, they can easily use the other half of their money to cover pleasure spending and for savings.
Also, this financial system will allow them to consistently save money (or invest it) over time. Think about how financially secure a person could be if they could consistently save 20% of their income over a 30-year time period. Depending on the amount of money they can save, they might be able to make millions by the time they retire.
Also, this plan takes into account that people just don’t want to spend all of their money on paying bills and being financially responsible. People want to spend their money on getting things they want in life. They want to go out and have fun, they want to take vacations, and they want to buy the latest gadgets. Having 30% of your money available for this purpose makes sense.
The 50 30 20 Budgeting Method helps a person to maximize their income by neatly focusing it into 3 categories. Each category can then be used for its intended purpose. A person using this system doesn’t have to spend a lot of time tracking their spending or figuring out where they need to cut back on expenses. All they have to do is divide their money up by the 3 percentages and use the money in each category for its intended purpose. Now, for the cons of this financial system.
The 50 30 20 Rule Cons…
The 50 30 20 Budgeting Method does have cons. First, some people cannot realistically divide their income into 3 categories according to this plan. The fact is that not everyone has the income to do this effectively. Think about the following point.
Low-income earners might not make enough money to cover their basic needs with their pay check. A lot of low-income earners have to use more than half of their pay check to cover their living expenses. Some people have to use 70% (or even more) of their income to keep a roof over their heads.
Unfortunately, this has been a problem in the modern pandemic world. Many low-income people have been affected by quarantines, shutdowns, and closings of businesses. Their income has been hit hard. They faced eviction or foreclosure and they also had to deal with not being able to cover their utilities. Most of their money has to go toward survival.
People who live in parts of the country where the cost of living is high might will also have problems with this system. Again, if a person has to spend most of their income on keeping a roof over their head and paying the bills; the 50 30 20 Budgeting Method won’t work for them. There are people that live in places such as San Francisco, New York, Los Angeles, or even London where the cost of living is very high. These individuals make enough to pay for their rent (mortgage) but they usually don’t have enough money to put away for savings.
The Final Verdict…
The 50 30 20 Budgeting works for people who can really make enough money (after taxes) to use this plan. However, it is not suited for everyone. Don’t forget the following point. Some people can’t live within a budget at all. So, a budget like this isn’t manageable for everyone. However, if a person’s income allows for this type of financial planning, this system can (and does) work for them.