Is the 60/30/10 Saving Model Going to Replace the 50/30/20 Saving Method?
When it comes to personal finance, strategies for budgeting and saving have long been regarded as fundamental tools for achieving financial stability and security. Among these methods, Senator Elizabeth Warren's 50/30/20 rule has been celebrated for its simplicity and effectiveness. However, as economic conditions evolve, questions arise about the relevance and feasibility of this once-popular approach. Is it time to move past the 50/30/20 method and embrace a new way of saving?
Introduced nearly two decades ago in Warren's book, "All Your Worth: The Ultimate Lifetime Money Plan," the 50/30/20 rule allocates 50% of after-tax income to needs, 30% to wants, and the remaining 20% to savings or debt repayment. This formula aimed to strike a balance between financial responsibility and lifestyle enjoyment.
Yet, in today's economic climate marked by soaring housing costs and stagnant wages, adhering strictly to this guideline may pose challenges for many individuals and families.
The crux of the issue lies in the mismatch between income levels and the cost of living, particularly in high-cost areas. "While the 50/30/20 rule may work well for those with comfortable incomes in reasonable living environments, it falls short for individuals grappling with exorbitant housing expenses," Elizabeth Pennington, a senior associate at Fearless Finance, points out.
"If you’re taking someone that’s just starting or living paycheck-to-paycheck, it can be unrealistic or overly drastic, especially as they’re beginning to really get a handle on their finances," Brian Walsh, head of advice and planning at digital bank SoFi, told Time.
However, the 60/30/10 model, a revised version of Warren's rule reflects the contemporary economic landscape. Under this framework, 60% of income is allocated to needs, 30% to wants, and 10% to savings or debt repayment. This adjustment acknowledges the shifting financial dynamics and offers a more attainable target, particularly for those struggling to make ends meet in high-cost regions.
Moreover, experts emphasize the importance of allowing for personalization and gradual progression within budgeting strategies.
Kevin L. Matthews II, founder of BuildingBread, underscores the need for flexibility, stating, "It’s important to have rules of thumb and structures that can help guide us and get things organized, but there aren’t any rules that are written in stone, and that’s important to know."
By granting individuals the autonomy to adapt budgeting methods to their unique circumstances, financial planning becomes more inclusive and sustainable. A key aspect of this adaptability involves recognizing the significance of incremental progress over time.
Instead of expecting immediate adherence to stringent budgetary constraints, financial advisors advocate for a phased approach to savings goals. Brian Walsh of SoFi suggests a five-year window for individuals to work towards their ideal savings levels, allowing for career advancement and increased earning potential.
However, while flexibility is encouraged, certain financial priorities remain non-negotiable. Experts stress the importance of maximizing employer retirement contributions and addressing high-interest debt before focusing on discretionary spending.
"Make sure you get every single cent of the employer match. It’s a 100% return on your investment," Michael Finke, professor of wealth management at the American College of Financial Services advises.
