The importance of ’50’ in the 50/30/20 rule

As I’ve mentioned before, I put a lot of store in the 50/30/20 rule of thumb championed by Elizabeth Warren, among others. The basic premise is that your money should be allocated 50% to your needs, 30% to your wants, and 20% to long-term savings. (For the record, I’m not quite there; our needs stand at 52%, and we put a lot toward extra debt repayment so our savings rate is closer to 14% than 20%.)

The main reason I like it is that it’s a simple way to impose balance on your finances. In an ideal world where you can basically stick to it, you aren’t just working to live, you have a lot of flexibility to satisfy some wants but, at the same time, you’re not neglecting the future.

But in these past few days I’ve really begun to appreciate another aspect that Warren touched on in her book that I never really thought as seriously about.

In our household there’s been much excitement, anxiety and dithering lately about our future. Without going into too much detail, one of the possibilities is that our take-home pay could decrease significantly. This would be a voluntary decision if it happened.

We budget to the penny, so at first glance it seems impossible: How can we spare to lose any income? But stepping back and looking at the budget, one thing is clear: We don’t need “wants,” and savings and extra debt repayment can be put on hold for short periods of time if necessary. So, since we manage to keep our needs to just 52% of our after-tax pay, we could actually see our income cut in half and not be in any immediate danger of going under financially. We wouldn’t have as much fun, we wouldn’t be making progress toward our long-term goals of being debt-free and owning a bigger home, and we wouldn’t be contributing to savings. So hopefully it would be a short-term condition. But it’s a much better place to be than if we were still living paycheck to paycheck, spending every penny and then some just to stay afloat.

And all that said, it’s unlikely we’ll lose half our income. Maybe more like 10% or 20%, if any. So it would be more a case of looking at our “wants” and “savings” categories and saying, OK, which of these things can we cut out for the time being? We’d be able to keep some of it; we’d just have to really get our priorities straight.

So I’m actually grateful for the uncertainty we’re experiencing right now about what the future holds. It’s helped me see that we’re not struggling as much as I feel; it’s just that I’m so determined to utilize every penny, it feels like there’s no flexibility in the budget. Now I know there is. And more important, my family knows there is. Since I’m the only one doing the budgeting, all they know is how I feel, so I know at times I’ve made them feel like we’re still on the brink of disaster.

The moral of the story? Take a look at your budget (if you don’t have one, make one). See how much of the money going out flows toward needs vs. wants and savings. The lower you can get that “needs” number, the more financially independent you are. You may still need some income, but it will be a great comfort to know that you don’t need all your income.

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3 thoughts on “The importance of ’50’ in the 50/30/20 rule

  1. honour

    Problem: we all have different definitions of needs and wants. DH & DSs view tier 2 cable with all the sport channels as Needs while I would like to discontinue cable whose price increases quarterly for example. As the frugal one, I see some spending as un-necessary…beyond ‘want’ but am out manoeuvred by the 3 adult males. DH’s believes that it’s about control. Big changes 2014, we’re nearly empty nesters, DSs about to graduate from university and unlikely to return to this city. My goal is to de-clutter and sell, re-gift or donate stuff not used or needed.

    Reply
    1. teambaby

      I guess it depends on whether the family members actually know how much money is going toward each category and can argue that something should be re-classified. My family can see my budget anytime they want to, but they honestly don’t ask to see it. So I’m free to classify things as needs or wants as I see them, and try to keep that needs number to 50. They trust me to say this is how much we have to put toward wants, so if you want to start spending money on x, these are the things we can choose to cut.

      If your family members are saying that cable is a “need,” that could actually benefit you if you can get them on board with the 50/30/20 rule. You could say, all right, if this is a need, it bumps our needs category up to 60% (or whatever) and that’s not a comfortable place to be, so let’s talk about other needs we can cut back if you’re unable to cut cable. If you can actually get your needs category to 50 including cable, that leaves more free “wants” money. It might help them get creative about cutting other needs — or admit it’s a want, and agree to choose between that and their other wants.

      Reply
      1. honour

        Thank you for your thoughtful response. Our cash flow/budget is on a flip chart, tacked to the back of the office door and DH reluctantly agrees to look at it quarterly. Income is their platform ‘we can afford it, why fuss, we should bump it to tier 3’ yadda yadda …I rank it with smoking. Those people willingly spend money to burn a product that shortens their life and makes their breath and clothes stink.

        Hope you have a wonderful holiday. It’s grand of you to do Ordinary Savers

        Reply

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