Is the 50/30/20 rule realistic? Not for most people, and that's fine

The 50/30/20 rule is everywhere. It's usually the first budgeting rule you run into, and it goes like this: out of your monthly income after taxes, half goes to needs, 30% to wants, and 20% to savings and debt payments. Three categories, three percentages.

If you're new to budgeting, or you're just trying to get your personal finances sorted out, that's a lot of pressure. You're being told what your monthly budget should look like before you know what it actually looks like. And if money's tight, or you've never sat down and added up what goes out every month, that's a rough way to start.

It's also old. The rule was popularized by All Your Worth, a book Elizabeth Warren wrote with her daughter Amelia back in 2005. They called it the Balanced Money Formula. Rent has gone up a lot since then. Pay mostly hasn't. So for loads of people that first number is gone before they even start.

But honestly, the percentages aren't the real problem.

Is the gym a need or a want? That's where people quit

Say the percentages did work for you. There's still a step in here that stops people, and it isn't the math.

You have to categorize everything into three categories. Does the gym go in the needs category, or wants? What about your phone? The car you need for work but also kind of love? People spend more time arguing with themselves about needs and wants than they ever save.

I watched someone on a personal finance forum spend a whole paragraph trying to work out whether the tree farm he owns was a need, a want, or savings. He never figured it out. He never got to the budgeting either.

There's an easier question, and it's got nothing to do with whether you deserve the thing.

Not "is this justified?" but "has this already gone?"

Your rent leaves on its own. So does a $12 subscription you forgot about. One's a need and the other a want. But both already left your account, so when you're at the register wondering if you can afford lunch, neither one is money you get to decide about.

How to create a budget without the percentages

Since percentages never worked for me, I decided to do something very boring but quite effective instead. I only really have to do it once a year, then check on it now and then to make sure it's still accurate. Here's how it goes.

1. I write down all the money I don't really have. Mortgage, utility bills, phone, insurance, every subscription. If you rent, that goes in. If you're carrying a balance on a card, the minimum goes in too. I open my banking app and go through a couple of months of bank statements. I don't sort any of it and I don't judge any of it. Takes about ten minutes. (It's also why I don't track every expense.)

2. I pick a savings number and treat it like another bill. That's the only real decision in here. It goes at the top with the mortgage, not at the bottom with whatever survives the month. I set up automatic transfers on payday so it leaves my checking account before I see it. Twenty bucks into a savings account is fine. What matters is that I picked the number instead of hoping for it.

3. I take what's left and divide it by the days until I get paid again. That's what I can spend today. I've written up how that daily number works in more detail if you want the long version.

Your daily number is a fact, not a grade

With the 50/30/20 rule you get three targets, and then you find out you missed them. Here there's nothing to miss. I picked the savings number myself, and the bills are whatever they are.

Say your take-home pay is $3,200 a month. $1,950 of fixed costs goes out on its own. You decided $150 is savings. That leaves $1,100 for the month, which is about $37 a day.

Run that through the rule and it flunks. Fixed expenses are 61% of monthly income. Savings is under 5%. On paper it's a mess. In real life it's a perfectly good monthly budget, because you know what you can spend and something lands in the emergency fund every month.

If you can save more than 20%, save more than 20%

Everybody argues with this rule from below. Almost nobody points out that a fixed percentage is a ceiling too, not just a floor.

If you can comfortably put away 40% of your net income, the guideline is telling you to allocate 30% to stuff you want. Follow it properly and you'd save less than you could. Which is a strange thing to be told.

But what if there's nothing left?

Then there's nothing left, and no budgeting method fixes that. Not mine, not the rule, not whatever you read next. If your monthly expenses eat everything, the problem is the bills or the income, and a nicer spreadsheet won't touch it.

What does change is that you stop failing somebody else's percentages on top of an already hard month.

And savings first still works. It just works at a smaller number. Five bucks you actually move beats 20% you never hit.

So is the 50/30/20 rule useless?

No. If your needs run way past half your income, the rule is telling you something real about where you live or what you earn. That's worth knowing. Rules like this one, or the $27.39 rule, are decent for spotting a problem. They're just not much use for deciding anything.

But knowing it doesn't help you this week. You can't fix your cost of living by Friday. I use the rule about once a year, just to see whether the rent and the utilities have crept up on me while I wasn't paying attention. What I don't do is treat it as a test I have to pass before I'm allowed to start.

So write down the money you don't really have, pick a savings number, and spend what's left. You can always check the percentages afterward if you're curious.

What to remember

• The 50/30/20 rule is a guideline, not an entrance exam. You don't have to pass it before you can start budgeting.
• Deciding what counts as a need and what counts as a want is an argument you'll never finish. Ask what's already left your account instead.
• Write down everything that's committed: mortgage or rent, bills, insurance, subscriptions. That's the money you don't really have.
• Pick a savings number and treat it like a bill. It goes at the top with the mortgage, not at the bottom with the leftovers.
• Divide what's left by the days until you get paid again. That's what you can spend today, and it's a fact rather than a score you can fail.
• If you can save more than 20%, save more than 20%. A fixed percentage is a ceiling as well as a floor.
• If nothing's left once the bills are out, no budgeting method fixes that. It's a bills problem or an income problem, and it isn't a mark against you.

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If you'd rather not do this math every month, that's basically why I built BentoMoney. You put in your income, your fixed costs and what you want to save, and it gives you one number: what you can spend today. Spend less and it rolls over. Spend more and it comes off tomorrow.

If you want to see how those numbers become Available Today, How BentoMoney calculates Available Today walks through it.

No bank connection, no account, nothing leaves your phone.

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