Can You Still Apply The 50-30-20 Budget Rule In 2022?

Drafted by US Senator Elizabeth Warren in her book called All Your Worth: The Ultimate Lifetime Money Plan, the 50-30-20 rule is a popular approach to handling household budgets. Simple and effective, this was the ultimate budgeting plan around the time the book got published. However, is the 50-30-20 rule still relevant in 2022?

This is the question we’ll be dwelling on today in this article. Read on to learn what the famous 50-30-20 approach is and how applicable this is in today’s scenario.

What is the 50-30-20 Rule?

As stated above, the 50-30-20 is a budgeting method designed with ultimate simplicity. This is a very easy and comprehensive rule that one can use to manage one’s individual or a household’s budget. The basics of the plan include spending on three key areas, classified into one’s Needs, Wants, and Savings.

Spending on your Needs

 According to the strategy, no more than 50% of your after-tax income should go to your needs. Needs can cover the household necessities, including your rent or mortgages, daily transportation outlay, groceries, and other utility expenses. It can also incorporate your debt payments and other outstanding bills.

Spending on your wants 

The next 30% of your income can be used on your self-care and other wants. This may include entertainment expenditure, including the costs of dining and hanging out with your friends. The same goes for money spent on hobbies, vacations, and certain desirable purchases…. the things you want to do.

Money kept for savings 

Finally, the rest 20% goes to savings. The savings category contains everything from an emergency reserve to retirement funds. However, money kept aside for buying certain things which aren’t needed, will not fall under savings. Only accounts that promise to provide certain financial security, will be part of your savings.

However, paying extra debt than the minimum amount required for a duration of time can count in savings. Doing this will save you from a high-interest rate, automatically improving your financial rank. In other words, you will be able to decrease the total amount of interest you would have to pay in the future.

What are the Pros and Cons of the 50-30-20 Rule?

Like any other technique, the 50-30-20 rule has its advantages and disadvantages.

Pros of the 50-30-20 rule

• The most appreciated thing about this rule is the simplicity. It’s very easy to decide where you should assign your money. It helps you create a strong base for your budget plan, especially if you are a beginner.

• As it allows you to spend 30% of your income on your wants, it is pretty generous. By applying this rule, you will make sure not to deprive yourself of satisfaction and enjoyment.

• The 50-30-20 rule motivates you to keep your unnecessary costs down. Covering the essentials under 50% helps you avert a financial crisis. Moreover, it gives you a strong limit to follow in order to increase your chances of long-term financial health.

Cons of the 50-30-20 rule

• While the 50-30-20 rule seems pretty favorable, it might not work well for low-income households. In some cases, adjusting all your essentials under 50% will not be possible, especially if you don’t have a good salary. This might affect your planning and ruin the ultimate outcomes for you.

• Sometimes you might not get a clear idea of what is a need and what is a want. It can potentially create a miscategorization of spending in your households. Furthermore, assigning 30% to your additional desires could make you feel like spending on things that could have been better avoided.

• Additionally, one could say that deciding on a fixed 20% of your income isn’t ideal. You may need to save more than that in order to have a secured future after retirement.

How safe is this Rule to be applied in 2022?

Technically speaking, the 50-30-20 rule still holds value in 2022. The suggestion of keeping 20% of the income for savings is not a bad deal for households. It is able to provide a significant amount of financial security.

Moreover, circling fixed expenditures under 50% is a wise idea. As it covers debt repayments also, it will save households from further issues and is beneficial in the long term.

However, the major concern with this rule is whether the 50-30-20 is correct enough for all households. Speaking of which, the rule may not be suitable for low-income households. Their essential expenses can exceed more than 50%, and thus it will be discouraging for them in the first place.

Additionally, if you have high-interest debts, this particular rule will not resonate with paying that down. Instead, it will need you to pay the minimum possible, putting that into the needs category.

What are the merits of the 50-30-20 rule in the current scenario?

Besides all the cons and drawbacks, the 50-30-20 rule has some serious merits.

• It gives a great framework for creating a basic budget plan. Giving a strong starting point to households, leading them towards a healthy financial plan. However, a little moderation or customization will make it ideal for one.

• It suggests preserving a good amount of 20% for savings, which is quite beneficial for your future security.

• If possible, you can include debt repayments into your needs, which will reduce your burden and save you for later.

Thus, by properly reviewing their expense levels, households can easily determine how and where they can spend. The 50-30-20 rule encourages them to narrow down their vision to clearly see how to spend correctly and sustainably. It makes financial independence easier to attain with an approach worth considering.