The 50/20/30 Budget

MSN Money details what they call the "50/20/30 rule" for budgeting as follows:

According to the 50/20/30 rule, your monthly budget should be divided into three distinct categories of expenses: 50 percent should be reserved for essentials (think housing and food), 30 percent should be allocated for lifestyle choices (things like nights out and 121 channels of cable) … and at least 20 percent should go toward what we call “financial priorities,” which include debt payments, retirement contributions and, of course, savings.

This is the first time I've heard of this "rule" and wondered what you all think of it?

Personally, here's the progress I suggest for people:

• Start with a 10/10/80 budget - 10% giving, 10% saving, and 80% spending. If you're in a tough financial spot, you could begin 5-5-90, but I wouldn't go lower myself.
• As you grow your career, begin to increase the lower numbers so you start to give and save more.
• Use extra income (like from a side business) to give/save even more.
• Do this for long enough, and you'll become wealthy. :)

Thoughts from others?

Comments

[Elisabeth]

I think my life budget looks like: Tax 20%, save 30%, spend 50%.

[elb]

Budget is net of taxes.

Think this is the "All Your Worth" / Elizabeth Warren budget. It's a pretty good guideline for beginners, although saving is probably less than the average FMF reader.

[getagrip]

The MSN article is a bit short on the details laid out in the book. The basic point of the book is that a 50/30/20 rule should allow you to enjoy a balanced life given their rationale. Ultimately the point of it is to make you look at your finances and balance them to get closer to your goals. I don't think they ever claim their percentages were ideal, or couldn't be adjusted for personal tastes. From what I recall from the book I certainly don't think the idea was for large wealth creation and was more along the lines of controlling your spending without tracking every penny and to enjoy your life and plan for a reasonable future.

[Jason]

in your 10/10/80 rule, do you consider 401K to be included in the 10% for savings? or is this from take home regardless of what gets put aside for 401K?

[Jonathan]

I definitely feel that saving is too low in the 50/30/20 budget, and spending (whether discretionary or not) is too high. At least, for anyone who's goal is to get wealthy sooner rather than later.

We don't specifically track it this way, but by my estimates our budget is approximately 15% tax, 15% spending, 25% giving, and 45% saving/investing. In real dollar amounts, spending has been fairly consistent over the years while most of the income gains have gone to giving and investing. With this plan we are more or less on track to be financially independent by age 40 (10 years) but with Baby #1 due soon, that could change.

[JNEW]

It is a constant struggle. As you make more money-- the percentage needed for taxes go up,up,up. As you have kids the percentage available for fun and games goes down, down down.

It tends to squeeze the savings portion out a bit.

But to the point:

My formula:

First: max out pre tax savings (17.5% +)with first job and forever after and invest in a simple age/risk appropriate allocation of low cost index funds (think vanguard)

Second: sock away 20% of your take home without fail-- same investing philosophy. Do not raid your savings to pay for lifestyle inflation.

Third: live on the rest prudently.

Do this and you will most like be wealthy.

If you can learn to "live" on 60% of your take home you will be better off in many, many ways. You will quickly become financially independent, confident, and will not be a burden on your friends, family or country.

And as Old Limey corrects points out--- the magic of compounding will begin working its magic early in your life and before you know it you will have more in investment gains each month than the savings you put in.

At that point-- your options become unlimited.

[JTS]

I think it is a good rule of thumb that, if nothing else, helps to make people aware of where there money goes. I think the breakdown is good for the majority of families. Some may say that savings is too low, but readers here and places like the Bogleheads forums are far different than the norm (not to mention, generally higher earners).

For me, it's a good reminder to find balance; I try not to skew too extremely too either side (spending or saving).

[VBee]

General guideline for me is 33(Tax)/33(Save)/33(Spend). Generally tax rates in US are less so more to Save and not Spend. My 2013 ratios are 27/46/27.

[VBee]

Oh and the Tax includes all Federal, SS & Medicare tax

[Pauline @ Savvy Scot]

20% savings sounds reasonable on any normal income. On minimum wage it may be hard. I donate 10% and save probably over 50% but have not run numbers lately, only the 10% is calculated.

[Old Limey]

@JNEW
Another thing that happens as you get older, and certainly after retirement, is that your expenses drop considerably for several reasons, such as:

The kids have moved out. Fortunately in our generation they also didn't need to have computers and their own phones (cell phones didn't exist so they shared our land line) and they all had jobs of varying kinds while at school so we never had to give them pocket money. Tuition at our local state university was also so low that they could pay it easily themselves.

California also passed a great law back in 1978 that limited the percentage that property taxes could rise every year by a maximum of 2%. Since we bought our present home in 1977 for $107K our taxes are very affordable. In 1977 they were $1,717 and for 2014 they are $2,410 on a home now valued at over $1.5M.

[FMF]

Jason -

I do it from take home and count 401k match as a bonus.

[JNEW]

@ Old Limey

Hi. I am familiar with that California law named proposition 2 1/2. I wish we had that in Maryland.

My property taxes are twice yours-- and my home is worth half as much. Now how is that fair?

But we persevere!

[Old Limey]

@JNEW
The law you mentioned was championed by:

Howard Arnold Jarvis (September 22, 1903 – August 11, 1986) was an American businessman, lobbyist, and politician. He was an anti-tax activist responsible for passage of California's Proposition 13 in 1978.

It of course received strong public support. It's main purpose was to prevent elderly people from eventually having to be forced to leave their homes because of rising property taxes.

Another advantage of the law that it allows one's property taxes to stay the same in the event that one's home is transferred to a close family member. In our case our home will pass on to our youngest daughter (now 53) and my weekly hiking companion.

[Kathy]

I'd switch around the lifestyle choices and financial priority categories. I'm sure its just me but I was always taught (by my parents) that if you owe someone money, repaying them comes before fun.

[Old Limey]

I agree with Kathy that "financial priorities" should rate higher than "lifestyle choices". The future is always uncertain and you never know what it might have in store for you. Once money is SPENT on buying STUFF, it's gone, whereas saving as much as possible will help provide a good sized investment portfolio during retirement when you may well face unexpected expenses as a result of the aging process which affects us all very differently. Alzheimers and Dementia are becoming larger issues as life expectancy increases.

[Jason]

@JNEW the issue with the Prop 2 1/2 is that public school funding in CA is pretty horrible. On average, the quality of the public schools in MD are likely higher than CA. So for Old Limey with a 53 year old child, that's fine, but if you have school age children, or children that need special services, good luck finding public school options that are acceptable and less expensive than $20K a year.

Where I live in NJ, fully half of my $19K in property taxes (on a house likely worth ~$925K) goes to public schools, and my children attend those, which are excellent. In my non-scientific experience, areas with less expensive property taxes generally have lower quality schools (NYC for example) (yes, city taxes on property are relatively inexpensive compared to the suburbs

[jdgjdg]

@Old Limey, @JNEW, @Jason

Our property taxes (in TX) are more than double Old Limey's with less than a fifth of the appraised value. Yes, that means he'd pay 10X the property tax here. Of course, we don't have any state income tax.

TX voted down a proposal for a similar property tax raise cap.

[jim]

Actually property tax revenues per capita are just about the same in CA and MD.

Each state gets about 30% of its tax revenue from property tax and each state gets about $5600/capita in revenue.

Thats not much different than the 35% and $5300 national average figures.

see :
http://taxfoundation.org/article/state-revenues-capita-fiscal-years-2007-2011
http://taxfoundation.org/article/sources-state-and-local-tax-revenues

[jim]

jdgjdg mentioned TX. TX gets 45% of its money from property taxes and the net amount is about the same per capital taxes as national average.

[Old Limey]

@JNEW, @Jason
I never realized I was getting such a great deal on my property taxes compared with other states.

Another advantage is that many other counties in California have a reciprocal agreement with Santa Clara County where I reside. Thus if I wanted to relocate to one of these I could keep my same tax rate. The counties that don't offer a reciprocal agreement tend to be the more desirable ones that don't want growth and a large influx of new residents.

[Noah]

@Jason

I'm a little late to this discussion, but according to US News & World Report, CA has the highest number of gold/silver high schools in the country, followed by MD. This obviously doesn't address elementary or middle schools, but it at least demonstrates that CA public schools are actually doing pretty well if you can live in a decent area.

http://www.usnews.com/education/high-schools/articles/2013/04/22/how-states-compare-in-the-2013-best-high-schools-rankings