Sen. Elizabeth Warren wants to make fixing the U.S. economy a priority if she becomes president, and she has a plan to do it. But long before she was running for president, Warren was a personal finance expert hoping to help the average American take control of their finances. She even co-authored two books on the subject. Her 2005 New York Times bestseller, “All Your Worth: The Ultimate Lifetime Money Plan,” includes her popular budgeting rule, the 50/30/20 budget. According to the 50/30/20 rule, 50% of your income should be dedicated to monthly expenses that are needed, such as housing, transportation and groceries; 30% can go toward wants or discretionary spending; and 20% should be dedicated to savings.
But does this personal budget rule actually work for Americans today? And what are the pros and cons of sticking to it? GOBankingRates talked to personal finance experts to get their opinions on Warren’s monthly budget rule. Here’s what they had to say.
Although not every expert agrees completely with Warren’s rule for how to budget, many do see the benefits of this budgeting plan.
It Can Help People Better Conceptualize Their Budgets
“In my opinion, everyone’s scenario is different but most people like to conceptually visualize things, and that’s where this rule works,” said Carlos Dias Jr., a financial advisor with Dias Wealth.
It's a Good Starting Point
“I like the idea of dividing up one’s budget between wants, needs and savings,” said Urban Adams, business development officer/advisor training at Dynamic Wealth Advisors. “I think it is a good starting point for families to think about budgeting. But like most plans, it needs flexibility for adjustment and should be reviewed regularly over time.”
“Most people don’t like to make or keep a budget. The 50/30/20 budgeting plan is meant to fix that problem,” said Hanna Horvath, personal finance expert at Policygenius. “Plenty of budgeting tactics focus on making drastic cuts to save money, but the 50/30/20 plan stresses balance. It serves as a straightforward guideline on how you split up your money. If you’re looking for a more hands-off approach to budgeting, the 50/30/20 budget rule may be best for you.”
It's a Good Rule for Novice Budgeters
“Elizabeth Warren’s spending and savings philosophy provides a good general framework for people to follow,” said Ali Hashemian, president of Kinetic Financial. “Many novice investors are looking for general direction on good financial habits. This type of strategy probably works best for a younger person looking to get focused on their financial well-being.”
It Ensures That Saving Is a Priority
“It works well with the ‘pay yourself first’ approach,” said Nermeen Ghneim, a banking expert and personal finance blogger for SavvyDollar.com. “Just set up automatic drafts and funnel 20% of your income to savings. Since the savings are automated away, you cannot spend it.”
Keeping Essential Spending to 50% of Your Income Gives You Flexibility and Freedom
“If you can keep your absolute essentials to 50% or less of your income, you are in a really good spot,” said Dave Lowell a certified financial planner and founder of Up Your Money Game. “Why is this good? Flexibility and freedom. If you can live on approximately 50% of your income, then you will be able to weather most financial storms you come across. Let’s say you lose your job. Instead of needing to replace 100% of your income, you only need to replace 50% of it to keep living. This means your emergency fund can be smaller. It also means that if you choose to leave your job and start a business, you can live on much less than you had earned and a small amount of savings can help you bridge that gap more comfortably. It helps you keep your options open.”
Saving 20% From an Early Age Will Have You Retirement Ready When the Time Comes
“If you are in your 30s and you are saving 20% for retirement, then the math will work out for you,” Lowell said. “You will be right on track to retire. If that 20% is automated each month, all the better. It also must be invested, not just sitting in a bank account.”
It Allows You To Enjoy Life
“The 30% going towards wants is good, too,” Lowell added. “It allows you to live in the present instead of just saving every dime for you to enjoy at some point in the future. It’s enough to have fun, enjoy life and do it responsibly.”
It Keeps Your Spending in Check
“This is a good way to save because it helps you limit your expenses to only what you need [and want] the most,” said Steven Millstein, a financial advisor and editor of CreditRepairExpert. “There are times when you might be tempted to get that [trendy] purse immediately after you get your paycheck. If the purse is going to take more than 30% of your net salary, you shouldn’t buy it.”
Some financial experts don’t think people should stick to the 50/30/20 household budget as a hard-and-fast rule. Here’s what they say are this plan’s shortcomings — and what budgeting tips you should follow instead.
Budgeting Should Be Tailored To the Individual
“Applying general budget rules to individuals is a risky endeavor,” said Jake Falcon, a chartered retirement planning counselor and CEO at Falcon Wealth Advisors. “Budgeting is too ambiguous on an individual level to state that someone needs to allocate certain percentages to each category.” He said the variables that can play a part in budgeting include someone’s age and financial goals, whether they are single or married, whether they have a single income source or multiple income sources and whether they are a business owner or employee of a corporation.
Half of After-Tax Earnings Is No Longer Enough To Cover the Needs for Many People
“The 50% number includes housing, insurance, food and transportation. We must have a place to live, minimize risk, have sustenance and go to work and get around,” said Morris Armstrong, founder and owner of Morris Armstrong EA LLC. “Depending on where you live, it may be very hard to keep those expenses in check. Remember, this book was written nearly 15 years ago and there have been substantial changes in employee benefits — employees likely bear more of the cost of health insurance now — [plus] rents are higher and salaries barely budged.”
Having a Bucket for 'Wants' Doesn't Allow You To See Where You Might Be Overspending
“Just tossing a number like 30% does not give much guidance to people in terms of looking for the value proposition in consumption,” Armstrong said. “Do you blow your 30% on dining out? Do you spend too much on clothing [or] not enough on charity? In my mind — and what I advise clients — is to watch the subcategories.”
It Only Works For Moderate-Income Earners
“It doesn’t work for low-income and high-income [earners],” said Igor Mitic, a financial consultant and co-founder of Fortunly.com. “It is hardly expectable that someone who brings home $1,000 after taxes can cover all the essential needs at $500. It is also hardly advisable that someone with a super-high income should spend 50% of what they earn [on essentials] simply because they can.”
It Assumes You Started Saving For Retirement at an Early Age
“This rule can’t work for someone who started saving for their retirement at the age of 40,” Mitic said. “The older you are, the more you need to set aside for retirement if you want to retire on time.”
Younger People Can Get Away With Saving Less
“The younger someone is the less they need to save or invest,” said Joseph Conroy, a CFP and financial consultant at Synergy Financial Group. “Someone in their 20s or 30s should try to set aside and invest 10% of their income. Someone in their 40s or 50s should set aside 15% of their income and [someone in their] 60s or 70s — assuming they are not yet retired — should strive for 20%.”
The Percentages for Needs and Wants Should Be Switched
“I would offer the thought of switching the 50% from needs to wants. Needs would then be 30%,” said Conroy. “That might sound silly at first, but in case there is an emergency, job loss or something along those lines, it is much easier to cut back ‘wants’ than it is to cut back ‘needs.'”
It Can Be Impossible for People With Debt To Follow
“The average American has more than $35,000 in personal debt, according to Northwestern Mutual’s 2018 Planning & Progress Study,” said Howard Dvorkin, a CPA and founder and chairman of Debt.com. “If they look at this rule, they’re likely to say, ‘Geesh, 20% of my paycheck should go to savings? I’ll never make that!’ Then they’ll simply give up. It’s like dieting. How many of us give up because the diet plans just seem too daunting? If we set the bar too high, they won’t jump it. They’ll simply duck under it.”
Paying Off Credit Card Debt Should Always Be Prioritized Over Saving
If you do have credit card debt, “you will want to focus on paying off the credit card instead of putting money towards savings, as the interest you pay on the credit card is far more than what you would earn in a savings account,” said Sue Musumeci, vice president and branch manager at Tompkins Mahopac Bank. You might fall short of the 20% savings goal with this plan, but your money will be put toward better use.
It Might Not Enable You To Meet a Specific Savings Goal
“While the 50/30/20 plan may be great for some, it may not be a great financial fit for everyone’s budget,” Horvath said. “If you are working towards a specific money goal, like buying a home or expanding your family, a more tailored and specific budgeting plan will work better for you.”
It's Too Rigid
“This type of financial direction is too general and rigid,” said Hashemian. “It doesn’t help investors determine what type of spending is necessary versus discretionary and what type of investing strategies should be utilized. It also doesn’t account for unexpected financial expenditures like buying a house or taking care of an elder parent.”
It's Too Simple for Advanced Investors
“Advanced investors with significant assets are not looking for help with spending and saving,” Hashemian said. “These people are looking for advanced tax strategies and strong risk-adjusted returns.”
It Doesn't Work for People With Variable Income
“A self-employed person or an emerging entrepreneur might struggle to use this method because their income is not always guaranteed,” Millstein said. “This is especially true if the business is a startup — the income may vary every month because the sales are not constant. Most smart entrepreneurs plow back the majority of their earnings into the business. This means that they use up more than 20% for investment purposes. Some are willing to go without wants because they want the business to survive and get off to a good start.”
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Karen Doyle contributed to the reporting for this article.
About the Author
Gabrielle joined GOBankingRates in 2017 and brings with her a decade of experience in the journalism industry. Before joining the team, she was a staff writer-reporter for People Magazine and People.com. Her work has also appeared on E! Online, Us Weekly, Patch, Sweety High and Discover Los Angeles, and she has been featured on “Good Morning America” as a celebrity news expert.