A couple reviewing their budget
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50/30/20 Is a Popular Budgeting Model — But Does It Work?

Danielle Letenyei - Author

Oct. 13 2022, Published 1:50 p.m. ET

Inflation. Recession. Skyrocketing gas prices. Soaring interest rates. Every day you turn on the TV, news of the worsening economy is enough to make you want to go back to bed and pull the covers over your head.

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With the rising costs of literally everything, now is as good a time as ever to start thinking of putting together a personal budget if you don’t already have one. Having a budget that outlines how much you need to spend on essentials like housing, utilities, and groceries can help you avoid spending too much on the things you don’t need.

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What is the 50/30/20 budget model?

There are several budgeting models out there that can help you structure your spending. One of the most popular ones is the 50/30/20 rule. Under the 50/30/20 budgeting tactic, you spend your after-tax income:

  • 50 percent on needs like rent or mortgage, utilities, groceries, etc.

  • 30 percent on wants like entertainment, dining out, vacations, and clothes

  • 20 percent on savings or paying off debt

But not everyone believes this plan is a good way to budget. So, does the 50/30/20 budget work?

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The 50/30/20 budget does work for some, but not everyone.

The answer depends on who you ask. The 50/30/20 budgeting trick was introduced by U.S. Senator Elizabeth Warren before her political career when she was a professor at Harvard Law School. Warren’s 2006 book All Your Worth: The Ultimate Lifetime Money Plan, which she co-wrote with her daughter, outlined the budgeting rule.

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"A lot of budgeting starts at the edges and works in 'cut back here' and 'trim over there.' That's a little like planning a diet by saying, 'cut out cookies' and 'no sugar in your coffee.' This approach may (or may not) work for slight modifications, but it is not a comprehensive lifetime plan. And if you don't have a master plan, then trimming a few expenses in one place while you overspend elsewhere won't do you any more good than cutting out doughnuts while you gorge on cupcakes," Warren wrote in the book.

Some financial advisers prefer alternate budgeting models.

Although the 50/30/20 concept sounds plausible, not everyone is a fan. Rachel Cruze, daughter of popular financial adviser Dave Ramsey and a financial adviser herself, believes the simplicity of 50/30/20 is its main drawback.

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“It’s actually not a great way to budget,” Cruze said during The Rachel Cruze Show on YouTube. “Your budget should live and breathe with you. You have to be able to change your budget depending on where you are financially.”

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Cruze, like her father, subscribes to the zero-based budgeting model of managing your finances. With zero-based budgeting, you assign a purpose for every dollar of income you earn. Your paycheck first goes to pay for your needs, and the rest goes to non-essentials, savings, and paying off debt.

There are other ways to budget besides 50/30/20.

If the 50/30/20 budgeting model isn’t for you, there are other budgeting methods you can use to get your finances in order. Other options include:

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The 80/20 budget model – This budgeting tactic simplifies your spending even more by separating your income into two categories — 80 percent goes to all your expenses, be they essential or non-essential, and 20 percent goes to savings. A drawback to this model is that it doesn’t help identify non-essential expenses that you may be spending too much on.

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The 70/20/10 plan – This budget model is more focused on saving and paying off debt than cutting back on non-essential spending. With the 70/20/10 budget, 70 percent of your income goes to all your needs and wants, 20 percent to saving, and 10 percent to paying off debt.

One-third budget – Shark Tank’s Kevin O’Leary, aka “Mr. Wonderful,” believes in a budget where you divide your after-tax income into thirds, CNBC reports. One-third of your income goes toward your housing, one-third goes to living expenses, and one-third is used for savings and investments.

One budget won't work for everyone. Be sure to research the different options and consider your own financial needs when selecting a budgeting plan.


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