50/20/30 rule

[Spondulix]

Now that I've learned more about MMM, I'm kind of shocked this is considered good advice...

http://www.learnvest.com/knowledge-center/your-ultimate-budget-guideline-the-502030-rule/

(Edited for clearer link)

[SaintM]

Most advice from the so-called financial pros are just veiled attempts to hawk their services.

[M from Loveland]

Yup, that's not a Mustachian advice, for sure. But I guess it can be a starting point for somebody on the 100% spending rule ;)

[LennStar]

Now that I've learned more about MMM, I'm kind of shocked this is considered good advice...

http://www.learnvest.com/knowledge-center/your-ultimate-budget-guideline-the-502030-rule/

(Edited for clearer link)

compared to "normal" saving at least 20% is fairly good. (do not forget there are several strong hints at more).
If you live on minimum wage or not much above, more would be hard anyway.
Do not forget that a lot of people earn not very much. Average is always way bigger then median (the middle income) and that is quite a bit above the lower incomes, especially on one-earner-hourholds.

That said, Mollys "tight budget" is nowhere near minimum wage. Lets just take out 1/3. We are at 1500  and "fixed" costs are 1100. Groceries not included.
That I would concede to be slightly tight.
And now a bit of optimization:
Gym%Subsc. -75$
Phone, Internet, Transportation: Lets say -25$ since we dont know situation.
Flexible spending: 675->375$ should be doable.
= +400
saving total before: 475$
= savings rate from 21% up to (guess) 35% with easy steps.

That I would consider healthy financial advice for people who just start their career and dont want to go mustachian.

[MDM]

I've seen a lot worse: many "advice" columns suggest saving only 10%, not 20%.  And the 20% savings in this article is suggested as a minimum.  The article assumes 401k contributions as a given, suggests Roth IRAs, etc.

Maybe not as good as the Mustachian 1% (or whatever % Mustachians are), but a very large percentage of people would be better off with the 50/20/30 than what they currently do.

Be gentle with the unconverted - start with baby steps. ;)

[JR]

20% savings rate is fine for those that plan to work a full 40 year career.

[Jags4186]

50/20/30 was developed by I believe Senator Elizabeth Warren. It is a perfectly acceptable method to teach to people and for the majority of people this would set them up for a successful normal retirement.

[Gin1984]

I thought I was good saving 15-20% for retirement and 1-5% for an EF until I found MMM.  For someone who does a full career 15-20 is fine, but if you want to not be normal and become FI, you need more.  It all depends on what is important to you.

[slugline]

I think it's important to point out the author is talking about allocating take-home pay dollars. If you make at or below the median U.S. salary and contribute heavily to a workplace retirement account like a 401K, you could do 50/20/30 and have an overall savings rate of 40% or more.

The real problem is that it reads like a one-size-fits-all prescription, which isn't reasonable because of the variety of incomes available. Instead of budgeting in percentages, I prefer to just start at zero and question every expense.

[fantabulous]

I think it's important to point out the author is talking about allocating take-home pay dollars. If you make at or below the median U.S. salary and contribute heavily to a workplace retirement account like a 401K, you could do 50/20/30 and have an overall savings rate of 40% or more.

The real problem is that it reads like a one-size-fits-all prescription, which isn't reasonable because of the variety of incomes available. Instead of budgeting in percentages, I prefer to just start at zero and question every expense.

It does serve as a crude limit on lifestyle inflation for increasing income, at the least. And it is a "no more than" suggestion, rather than an "always inflate to" suggestion.

[arebelspy]

GetRichSlowly used to push this rule a lot (IDK if they still do, I don't read it anymore); JD was all about it.

It's better than many people are doing, but it's based on misguided principles. There are better ways to align your spending with your life and values and optimize, rather than having rigid and arbitrary percents.

[LalsConstant]

I think the principle is great if one looks at it as an idea and not an absolute rule.  I used it to develop my own rule I aspire to: 50/40/10 (save and invest, live on, give away!).

I am... nowhere near that lofty goal yet haha.

[Apples]

I agree with the rule for take-home pay.  I just put all needs in the 50%, including monthly money set aside for medical expenses, car maintenance, etc., not the 50% for fixed expenses or however they describe it.  I actually make a personal goal of flipping the 20% and 30% since we're DINKs, though with median, not high, incomes.  So we save 30% of take-home and spend 20% on all wants.  My rationale is that we will have kids in a few years, and at that point will aim for the 50/20/30 rule, and until then should save 30%.  Of course our situation will change over time, and maybe we'll be saving 40% of take-home with kids, we will not needlessly increase spending just to meet an arbitrary guideline.  But 50% for needs is a really good rule of thumb for us; we're hovering around 48% right now on a monthly basis, which is a bit lower than that on an annual basis.  I think this functions as a good way to check in on if our finances are "balanced" at the most basic saving/spending level.

[arebelspy]

Oh my.

Maybe coincidentally 50% of your income right now matches your spending, but it's not a good rule because your spending and income should be completely decoupled.

If your pay doubled overnight, should you double your spending?

If you took a 50% pay cut, would your spending halve?

I'd say the answer to both of those would be, and should be, no.  Meaning that your spending now being 50% is, as said above, a coincidence. Meaning this is not a good rule at all, even if it randomly matches you right now.

[pzxc]

In other words, best to stick to the X, 100-X rule.

:)

[dragoncar]

I prefer the 50/30/40 rule

[Scandium]

I think it's important to point out the author is talking about allocating take-home pay dollars. If you make at or below the median U.S. salary and contribute heavily to a workplace retirement account like a 401K, you could do 50/20/30 and have an overall savings rate of 40% or more.

The real problem is that it reads like a one-size-fits-all prescription, which isn't reasonable because of the variety of incomes available. Instead of budgeting in percentages, I prefer to just start at zero and question every expense.

It does serve as a crude limit on lifestyle inflation for increasing income, at the least. And it is a "no more than" suggestion, rather than an "always inflate to" suggestion.

It does? I think it's the opposite. They couple making $150K have $2,000 for "flexible spending", just because they make 5x what the first example does. It also handily inflated the transportation/car budget from $115 to almost $800(!) even though these people could work in the same building. But hey, it's less than 50% of my income right?

On the other hand; I put 20% into my 401k so if I follow this and save 20% of my take-home, that would mean over 40% savings rate though. Which isn't bad.