Budgeting effectively is one of the most important parts of a personal finance plan, and there are about as many budget solutions out there as there are weight loss solutions. Much like the get-trim-quick advertising that accompanies the latest workout fad, there can be a fair bit of hype behind the rise to popularity of any given budgeting strategy, and no one strategy is guaranteed to change the way you manage your money for the better – it’s the effort and commitment to a course of action that will really make a difference, no matter how you go about it. That being said, today’s blog takes a look at the potential pros and cons of one of the longest-running budget management systems: the 50-30-20 budget.
Simply put, the 50-30-20 budget divides your after-tax income into three buckets. 50 percent of what you earn is supposed to go toward your “Essentials” – food, shelter, transportation and anything else you use every day.
Twenty percent goes toward long-term savings or investment in whichever form you deem the most valuable, plus any payments toward existing debt, and the final thirty percent is earmarked for “lifestyle spending” or any non-essential purchases that you may need to make.
Expectations vs. Reality
This sounds like a great system for broad-spectrum budgeting and tracking where your earnings go every month. It’s also an excellent place to start for anyone new to managing their money on their own. However, in the third quarter of 2015, Statistics Canada estimated the household savings rate at 4.2 per cent rather than the lofty 20 percent that the 50-30-20 plan says is ideal. In that sense, the 50-30-20 budget can be seen as an admirable goal to work toward for many households. Additionally, as household debt value in Canada holds steady at above 150% of disposable income in aggregate, the importance of allocating money to paying off debt over time may skew much higher than 50-30-20 proponents suggest it should. Some advisors suggest that any payment you cannot forgo without penalty, such as a credit card payment, be considered a “necessity.”
Despite its underlying numbers not matching up with financial realities for many Canadians, a 50-30-20 budget may also shed light on the best ways to make changes to one’s expenses and lifestyle to achieve a better savings rate and better financial health. For example, overspending in one or other of the expenses categories should be cause to dig deeper and break down the biggest contributors – for many people, vehicle-related costs are a much bigger slice of the “essentials” bucket than they could be with certain optimizations. For others, putting the distinction between necessities and discretionary purchases into sharper focus could be a powerful agent of financial change.
One Size Doesn’t Fit All
One of the benefits of 50-30-20 budgeting is that it provides a baseline from which to adapt. Even if your finances don’t match up to this particular percentage schema, you can take a look at where you are now and set goals to get to a certain savings rate within the next year or two. It’s simple, and quick to calculate, the size of each of your “buckets” – but these are only the foundations on which your more precise and personalized budgeting strategy should be built.