Stop! I Tried Elizabeth Warren's 50-30-20 Rule!

They say the 503020 rule is the ultimate budgeting hack. So since doing a video on this so-called perfect ratio, I've been doing a lot of studying and applying it for nearly a year. I did that show back in April of 20124, and guess what? It still doesn't work. At least it doesn't for me, and probably not for most people, and I'm going to show you why.

Welcome back to We're Talking Money. I'm Phil Clark, and today I'm going to break down my personal experience with this 503020 rule: what worked, what didn't work, why it could be sabotaging your financial goals if you're using this basic 503020 thing that Elizabeth Warren talked about in such a big way just a few years ago.

Let me give you a quick refresher. The 503020 rule says you should spend 50% of your income on need, 30% on wants, and 20% on savings or debt. Those are combined. Now, since last April 2024, I tracked every do to fit into these categories. I adjusted my spending habits, prioritize need over wants, and I stuck to that 20% savings target. Easy enough, except the results don't work with my long-term goals.

Let's look at how this Elizabeth Warren rule plays out, the first three things to fall apart. Number one, it's rigid categories. They don't fit real life. We all know that life, it's not that clean cut. Is my internet bill, for example, a need or a want? Are groceries essential? What about the fancy cheese or the special coffee bean? Is that essential? The gray areas made budgeting frustrating, quite frankly unrealistic. Some of us just simply go out and get what we want when we want it, and it's often a blurry picture when we're trying to decide what is a want versus a need.

Number two, the 30% of wants category is a trap. It just gives me a false sense of freedom. I found myself starting to justify unnecessary purchases because, hey, it's in the budget, it's within that 30%. But that mindset, it adds up fast. It will lure you into spending very quickly, simply because you can look at the budget and say, I have extra to spend. Fortunately, this exercise was not something that I allowed to get out of control.

Number three, the 20% savings goal, frankly, it's too low. If you want to build real wealth, 20% probably isn't going to cut it. It feels more like checking a box without making meaningful progress. That is a false sense of security. So for financial security, especially with rising cost, inflation and economic uncertainty, flipping the 30% and the 20%, that's probably a better target.

So what's the biggest problem? Well, the 503020 rule, it encourages mediocrity. It doesn't challenge you to optimize spending or aggressively grow your savings. It's like setting the bar low and being proud when you trip over it.

So if the 503020 rule doesn't work, what does? Well, let me give you some points. Reverse budget: focus on saving first, then spend what's left. Prioritize investments or retirement or both, and emergency funds.

The next point, dynamic budgeting. Listen, life changes, your budget has to change. You need to adjust percentages based on goals, income fluctuations and your overall priorities. You want to track, but you don't want to restrict. Awareness of your spending habits, it is more powerful than rigid rules. Regular reviews help you identify areas to cut, and you can do it without feeling deprived.

Most importantly, you need to build your personalized budget ratio. That means 5030 20 may not be for you. Instead of sticking to that one size fits all, you have to create a budget ratio that's based on your lifestyle, your goal. As your income grows or fluctuates, you adjust the ratio. Someone early in their career, they might need to increase that ratio to allow for, say, debt repayment, so that it's more of a priority. On the other hand, a higher earner, they might have retirement goals that require their ratio to focus more on the investment side or the savings side. That kind of flexibility and discernment is going to help you budget, and it's going to help your budget evolve with you.

So have you tried the 503020 rule? Did it work for you, or did you find some of the same weaknesses that I experienced? Let me know your thoughts. Love to have a conversation with you. If you found this video helpful, hit that like button, subscribe for more real talk money tips. No fluff, no gimmicks, just sharing what works, what I've learned over 33 years, trying to help you avoid falling into these check-the-box solutions. Hey, I'll see you next time on We're Talking Money.