The 50/38/12 Budgeting Rule: Is It Better Than the Traditional 50/30/20 Rule?

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In a recent YouTube video, financial influencer Katie Gatti of “Money with Katie” makes the case for her version of the 50/30/20 budgeting rule: the 50/38/12 budgeting rule. The traditional budget breakdown calls for spending 50% of your take-home pay on needs and 30% on wants, and putting 20% into savings.

Gatti’s version is more restrictive — she believes that, ideally, you should be saving 38% of your take-home pay and only spending 12% on “fun stuff.” Her view is that being aggressive about saving now will allow you to be financially free sooner.

“Rather than spending 30% on wants, 12% gets you a lot of bang for your buck, because it will shorten your financial freedom timeline by many, many years,” she said in the video. “Whatever we are able to strategically set aside every month or every year in life, that is going to have the highest ROI — it’s going go the farthest for us.”

But is this budget realistic? And even if you can save 38%, should you? Here’s what experts say are the pros and cons of the 50/38/12 budgeting rule.

Why You Might Want To Try the 50/38/12 Budgeting Rule

The stricter version of the 50/30/20 plan does have some upsides.

“This can be good for those who want to save up quicker, whether for a specific goal or to retire earlier,” said Kendall Meade, certified financial planner at SoFi.

She notes that the savings don’t necessarily have to be for retirement — you can save aggressively for shorter-term goals, such as a vacation or a down payment on a home.

Another positive of this budgeting rule is that it “can help you get used to living on less, which can allow you to continue spending less and saving more as you progress through life,” Meade said.

Make Your Money Work for You

Natalie Warb, financial expert at CouponBirds, also sees numerous advantages to adopting this budgeting rule.

“Firstly, it helps expedite the path to financial freedom and establish a solid foundation for a comfortable retirement,” she said. “By prioritizing savings, individuals can accumulate wealth at a faster pace, ensuring a more secure future.

“Secondly, it enhances financial security by creating a safety net for unexpected expenses and emergencies,” she continued. “Having substantial savings provides a cushion to cover unforeseen costs without relying on debt.”

Warb added that if you allocate this 38% wisely, it can compound into much more. “Thirdly, effective management of additional assets can generate additional income,” she said. “Investing in assets that provide passive income can create an extra stream of funds.”

Warb does acknowledge that this budget plan may only be ideal for certain individuals, but if you fit into one of these categories, it may be a good rule to stick to.

“Firstly, it benefits those with high incomes who can easily set aside a significant portion of their funds for savings without impacting their quality of life,” she said. “Secondly, individuals who have a strong desire to achieve financial independence quickly and are willing to make substantial short-term sacrifices will find this approach advantageous. Additionally, people with extensive purchasing experience and knowledge of maximizing discounts can effectively implement this budgeting philosophy.”

The Downsides

The 50/38/12 budget won’t be a fit for everyone.

“This type of budget may not work well for those who are looking to splurge now while they are younger [on things like] traveling,” Meade said.

Make Your Money Work for You

She also notes that sometimes when we aim to save aggressively and restrict spending, it may end up having the opposite effect.

“Being more restrictive may cause you to ‘revenge spend,'” Meade said. “This is where you say, ‘I did so well last month, I’m going to treat myself this month.’ The problem with this is that many times this actually causes you to spend more than you originally would have.”

Warb notes that adhering to this budget breakdown may simply not be possible for some people.

“This philosophy may not be suitable for individuals with lower incomes who are reluctant to sacrifice their quality of life to that extent,” she said. “For those already struggling to make ends meet, allocating a smaller portion to wants could negatively impact their overall well-being. Moreover, individuals burdened with substantial debts or financial obligations that demand a significant portion of their income for repayment may encounter challenges when attempting to allocate such a high percentage towards savings.”

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