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The 50-30-20 Budget is Stupid; Here’s What to Do Instead

the 50-20-30 budget is stupid

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The 50-20-30 budget is one of the most popular budgets according to personal finance “experts.” In it, you spend 50% on needs, 20% on savings/debt reduction and 30% on “wants.” This is a terrible plan for almost every income and lifestyle. The 50-30-20 budget is stupid and I will show you a better way.

How to Waste Money on a Budget

The 50-30-20 budget has pitfalls for entry-level and high salaries alike. First, let’s consider the following hypothetical spending of a 23-year old singleton college graduate who makes a slightly below average entry level salary of $38,000/year ($30,000/year post-tax) and has 4% salary increases:

Age Post-Tax $ Annual Wants Monthly Wants
23 30,000 9,000 750
24 31,200 9,360 780
25 32,448 9,734 811
26 33,746 10,124 844
27 35,096 10,529 877
28 36,500 10,950 912
29 37,960 11,388 949
30 39,478 11,843 987
31 41,057 12,317 1,026
32 42,699 12,810 1,067
 Total $360,183 $108,055

Starting with a modest entry-level salary and modest raises, this person has spent $108,055 over just 10 years on indeterminate “wants.” In other words, a 30% wants budget means that for every 10 years, she spends the equivalent of three full years of work on wants. Over a 40 year career, this number would increase to half a million – the full salaries for 12 years of work.

What Do You Get With $100k on Wants?

If you imagined spending $100k on “whatever you want”, you would likely think of having something really awesome and long-lasting. $100k is enough for a designer wardrobe, a nice car, some nice vintage furniture, lavish vacations, and/or a big wedding.

Budgets can be ways to restrain spending but, if used incorrectly, they can be the impetus to increase spending. Give someone without any financial experience license to waste $750/month every month. She probably has some ideas for amazing splurges but in reality, she’s going to spend money in easy ways. Average Americans can easily fritter away $18,000/year on nonessentials such as eating out, drinks, taxis, subscriptions, apps, streaming services, or online shopping.

At the end of 10 years, you have the latest versions of things you used to have when you were 23, your closets are filled with stuff, and you wonder, why am I still in debt?

Where Americans Are Not Spending Their Money (But Should)

I’m a believer that so long as you spend to ensure a secure future and on what matters to you, you are free to spend on whatever you want. But even with every financial advisor advertising the 50-30-20 budget, people spend on wants at the expense of needs. According to USA Today, “[t]he tendency to splurge consistently on nonessentials is causing Americans to skimp on other important items.”

38% of Americans say they don’t have enough money to fund a retirement account, 35% can’t afford a life insurance policy, 28% have credit card debt, and 26% live with a broken car because they can’t afford repairs.

In terms of achieving their dreams, 40% of Americans have never left the country – most citing financial reasons. 11% have never left the state where they were born. Americans think they are spending on the good life, but they are stressed and still can’t find the money to live the good life.

But if You’re Saving 20%, That’s Good, Right?

With all the talk about how little Americans are saving, if people started saving 20% of their salaries, they’d be in a much better place, right? I guess if your goal is to be better than the bare minimum, then yes, it may be better. But I also wonder if you’re striving to a very low goal, if you fail, are you really saving any money at all?

Age Post-Tax $ Average College Debt Annual Savings
23 30,000 -30,000 6,000
24 31,200 -24,000 6,240
25 32,448 -17,760 6,490
26 33,746 -11,270 6,749
27 35,096 -4,521 7,019
28 36,500 2,498 7,300
29 37,960 9,798 7,592
30 39,478 17,390 7,896
31 41,057 25,285 8,211
32 42,699 33,497 8,540
 Total $360,183
Let’s say you graduate with average college debt (I picked the average between private and public school debt). After 10 years of following this budget, paying down debt, you’ve saved $33,497 out of $360,183 take home. Ok that’s not so bad.
But looking at this another way, you’ve been gainfully employed for 10 years and you’ve really only managed to save less than 10% of what you’ve taken home. Let’s say you want to go back to school or have a kid or buy a house. You’ve spent over $100,000 on wants and you have $33k in cash. Furthermore, your early 30s is when things start to get expensive.

What If We Use Lawyer Salary Numbers?

The wastefulness of this budgeting plan is put into starker contrast with a higher salary. Let’s consider a lawyer’s trajectory on this plan.

Post-tax salary Debt Annual Debt Payment/Savings “Wants”
26 150,000 -150,000 30,000 45,000
27 163,500 -120,000 32,700 49,050
28 174,945 -87,300 34,989 52,484
29 187,191 -52,311 37,438 56,157
30 200,295 -14,873 40,059 60,088
31 214,315 25,186 42,863 64,295
32 229,317 68,049 45,863 68,795
33 245,369 113,913 49,074 73,611
Totals 1,564,932 469,480

*This is a very rough estimate – based roughly on BigLaw payscales and average law school loan loads, including bonuses and I’m not adding interest to the loans because I have you paying them off at record speed.

The 50-30-20 Budget is Terrible for Lawyers

Let’s say you work 8 years at a law firm. You are working crazy hours and you’re being paid to justify it. You make $1.5M over 8 years AFTER TAX! So impressive!

After 3 years of grueling law school, 8 years of grueling work, you haven’t even saved up enough money for one year of your expenses ($245k/2=$122.5k)!

Where did all your money go? Look at that number in the far right – almost half a million. That’s all “wants.” You spent FIFTY THOUSAND DOLLARS A YEAR on wants. You could set a luxury vehicle on fire every year.

After all, this is the best case scenario where you are continually employed, you follow a budget, and if something happens in year eight – like switching to a new job- you have very little leeway. In conclusion, this budget leaves you in a vulnerable position despite earning all this money and having a plan.

Why the 50-30-20 Budget is Stupid

The idea of using percentages without accounting for your your lifestyle or your income is an odd one. Whether you’re making minimum wage or a million dollars, starting our in your career or in retirement, single without dependents or the breadwinner for a family of 10 – somehow 50% is the right needs amount and 20% is the right savings amount. And it doesn’t take into account what your goals might be – a house, college tuition for the kids, or a little vacation.

At low incomes and young ages, 50% is likely far too little to spend on needs. And thus 30% is far too much on wants, when you really need to shore up savings. You are the most vulnerable to fluctuations in the market. And this is typically the cheapest time to live because you will have other people who live the same way and you may have fewer responsibilities. Your focus should be on learning and earning more.

At middle and high incomes, you’re just blowing through more money than at a lower income. As a result of following this budget, you’re not getting ahead.

My Problems with the 50-30-20 Budget

When I was straight out of school, I saved 50% of my income. In my first job out of law school, making 5x my entry-level salary, I saved 0% because I was aggressively paying off my loans. After I paid off my loans, I was back to 50%. And now that I’m in a funemployment year, I’m back to saving 0%. At no time did I save 20% and I’m not sure you could argue I would be in a better place if I had changed to a 20% savings rate. Following this budget would mean frittering money away when I was saving a lot and struggling immensely to find 20% in lean times.

Percentages don’t work for everyone and it’s silly to assume they would. Your salary expands and grows and your necessary items expand and grow. As they say, the only constant is change.

You Are Constantly Treading Water on a 50-30-20 Budget

The 50-30-20 budgets lacks a priority list. If you can get your must-haves to 50%, then the next most important part is 20% savings/debt reduction. But many people have necessary costs that exceed 50% and then scrap the 20% altogether.

Percentage increases let you increase your lifestyle mindlessly for all time. It doesn’t require you to think, hey I have enough now. That’s why people think, oh when I make $X, I will spend more responsibly. As you can see from above, it’s not true. You get on this mindset that if the percentages work out, you’re doing ok.

The percentages don’t matter – what matters is what you’re spending your money on. Yes you only wasted 30% of your money every year but why waste any money? Why not treat every dollar as valuable and important?

Wants is a dangerous category. We are often chasing things that not only don’t make us happy, but make our lives more complicated and expensive.

The 50-30-20 budget is something that’s marketed as one-size-fits-all but in reality  just fits everyone poorly.

The percentages mean nothing without goals. In my opinion, the 50-30-20 budget is stupid. There’s probably a better word for it, but it works. Therefore, instead of using this type of budget, here’s another perspective.

A Possible Solution  – A Goals-Based Budget

Twenty-somethings regret not traveling more, not building close relationships, not exercising, not trying new things. Instead of putting an indiscriminate “wants” category, perhaps you could subdivide your “wants” budget to address these possible regrets.

Chinese billionaire Li Ka-shing offered some interesting budget advice. SAfter his dad passed away, Li was forced to start working 16-hour days at age 15. He did not come from wealth but is worth an estimated $31 billion today.

Li’s advice is to divide one’s budget according to the following categories:

50% live. 20% save. 15% grow. 10% build. 5% play.
Since I’ve just railed on percentages, I’ll say here that these percentages do not need to be set in stone. Use it as a guideline for remembering to spend on things that will actually improve our lives – like our relationships and a meaningful career and higher earning power.
Moreover, I like how the “wants” category isn’t crazy. 5% for “play” sounds like a good reminder to incorporate fun into our lives while not neglecting any of the more important categories. Consequently, this budget seems to work better towards achieving one’s goals – that’s why I’m calling it the “goals-based” budget.

Here’s How A Low Income Budget Would Work

Here’s an example of what this looks like on the same $30k post-tax salary:

Live (the basics)

$800 rent/utilities
$150 food
$200 other necessary spending (insurance, phone etc.)
$100 transportation
Total = $1250=50%

Grow (learn and experience)

$50 building your network/dating (building new relationships)
$50 books/classes (structured learning)
$200 travel/trying new things/starting a new business (independent learning)
$75 charity

Total =$375 =15%

Build (acquire the things you will need in your life)
$100 furnishing your home/home needs
$100 furnishing your wardrobe/personal needs
$50 exercise (classes, building your own at-home gym)
Total = $250 = 10%

$500 savings/debt repayment
Total = $500 = 20%

Play (whatever you want)
$125 entertainment/eating out
Total = $125 = 5%

What It’s Like to Use a Goals-Based Budget

You get $50 to spend on networking this month. Who do you want to meet and treat to coffee? A cute dating prospect? Your coworkers? People with your potential dream job?

You get $200 to travel this month. Where do you want to go? What do you want to see? Paris? Polynesia? Pittsburgh?

You have $100 to spend on classes. What do you want to learn? Java? Italian? How to bake a cake? How to play the piano?

Even if you can’t make these percentages, it’s something to work towards. The point of a budget is structure, not perfection. Consequently, the beauty of this budget is that if you follow it perfectly, you will grow and you won’t squander too much of your money away on activities and products that you won’t remember.

Here’s How A High Income Budget Would Work

Here’s an example of the budget on a $150,000 post-tax high-income law salary:

Live (the basics)

$2400 rent/utilities
$550 food
$300 other necessary spending (insurance, phone etc.)
$300 transportation
Total = $3550=28%

Grow (learn and experience)
$300 building your network/dating (building new relationships)
$300 books/classes (structured learning)
$400 travel/trying new things/starting a new business (independent learning)
$500 charity
Total =$1500 =12%

Build (acquire the things you will need in your life)
$300 furnishing your home/home needs
$200 furnishing your wardrobe/personal needs
$125 exercise (classes, building your own at-home gym)
Total = $625 = 5%

$6,250 savings/debt repayment
Total = 50%

Play (whatever you want)
$625 entertainment/eating out
Total = 5%

Why This Budget is Better than 50-30-20

Looking at this budget, you can see a good balanced plan. First, 50% of your income is saved, which is great for quickly building an emergency fund. Second, it’s not stingy on lifestyle. You can have a decent apartment, go out to nice dinners, and see concerts and plays. But Third, you are spending a considerable amount of money growing a foundation for your career and your life. You can build relationships, go to classes and educate yourselves, and travel.

Finally, look at that charity budget! So many people start making money and never give back. $500/month is a lot of money but you’re making $12,600/month now. That’s only 4% of your salary. And you can do so much good with that much money.

Conclusion – Why the 50-30-20 Budget is Stupid

Some people say that the 20s don’t matter. Those people probably think life doesn’t matter, because every year matters. In your 20s you may (finally!) be out of school, and you can make your 20s can be all about growth. Even if all you learn is how to tread water, that’s a great skill.

Some people enter their 30s in hundreds of thousands of dollars in debt, but that doesn’t mean you have to enter your 40s with that debt. It doesn’t matter where you start – it matters where you’re going. Why can’t you use your 20s, your 30s, your 40s or whatever years you have to build a foundation for your career growth?

After reading this, what do you think of this alternative budget?
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