Not a fan of 50/30/20 budgeting

If you’re not familiar with the popular budgeting method 50/30/20, it’s an approach to help you align your spending and income with the goal of providing sufficient savings for emergencies and retirement. You spend 50% on necessities, 30% on discretionary, and put 20% towards savings. I’ve never done 50/30/20, so I decided to read several articles to understand the method.

First, I found conflicting interpretations of the rule. One article said “debt payments” went into necessities, but another said only the “minimum debt payment” went into necessities, while any amount above the minimum went into the savings category. And then the AI-generated answers varied depending on how I phrased the question. Either way, the objective of the method is for you to realize you’re not saving enough and probably cut back on discretionary expenses to save more. But here’s the problem: Do you put the organic estate-roasted coffee you buy into necessities? Heck, you could even argue that any coffee isn't a necessity in the first place. As I state in Volume 1 of my book, even your electric bill includes discretionary spending. Turn on a bedroom light to get something - that is necessary. Leaving the light on when you leave the room is discretionary.

Next is the problem of focusing on the percentages and categorizing every expense. The mortgage is a necessary housing expense, but is a landscaping service necessary and included in the housing expense? The method I follow is to work on lowering or eliminating every expense while minimizing debt and setting savings goals. A bit like the “budgeting backward” method; establish what you’re going to save first, then budget everything else with what’s left. If the budget is tight, look at every food purchase and drop down a notch. No more estate-roasted coffee; instead, buy the store brand.

Finally, striving to conform to some rule like 50/30/20 doesn’t reflect the reality for many. Today, with high housing costs, expensive child care, and college loan debt, younger adults need to focus on covering necessities, reducing debt, saving enough for emergencies, and only then consider whether there is anything left for discretionary spending and even retirement savings beyond the company match. Once debts are paid off and children are in school, plan to save higher amounts for retirement. All of us have been dealing with the high cost of living for the past few years, and let’s face it, there are times in life when you can save a lot and other times when you can’t. A great place to start is to look back at what percentage you saved the last two years, and if it was low, was it because of high discretionary spending? Challenge yourself to increase savings by 2% or more, and reflect that in your budget. With my method, I look at every expense line to find savings, sometimes in unexpected places like insurance (by increasing deductible), food (make more meals at home), electricity (hang clothes to dry), and gasoline (combine errands). And, notice the expenses I mentioned; expenses that we assume are not discretionary, thus can’t be eliminated. But across all expense lines, one can find the money for emergency savings and retirement.

So, rather than spending extra time trying to interpret and conform to 50/30/20, consider the method I described. The most important aspect of budgeting is making one and sticking to it. Over time, the budgeting habit will push you to a better financial place; less debt and more savings as you identify wasteful spending.