Everything wrong with the 50/30/20 rule budget?

So the person that made this popular is Elizabeth Warren, us senator, and expert on bankruptcy.

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1. How the Budget works
– You basically divide your after-tax income into 3 categories
– 50% needs, 30% wants and 20% savings, debt payments, emergencies, and investments
– Now to me this sounds off, by a lot, and I’m going to break down.

But before I do here is the pro to following this plan:
– You literally spend 80% of the money you make on things that will add not value to you and you need them for maintenance
– The only part of the 80% going towards something that can help you in the future is just a mortgage
– But even then when you have a house just personal use its liability, and your main objective should be to pay it off as fast as possible to free up all that income for investing.
So let’s Run an example:
– My name is Tommy and I make $48,000 a year ( take-home pay is $40k)
– So I can spend $1,676 on bills, $1006 wants, and then $670 on emergencies- debt repayments and savings for retirement
– So it’ll take me 15 months to have a fully-funded emergency fund
– 9 months for credit card debt
– 4 years for student loans
– And hopefully, now that I’m debt-free: I can use that 670 to invest each month ( sounds like messed priorities )

2. What’s wrong with this plan
– This Plan will work in a perfect world

For example:
– A world where you can go 15 months building an emergency fund ( without something happening )
– A world where you can guarantee you won’t lose your job over 5 years of paying the debt that could have been paid in half the time
– A world where most likely you only have one stream of income for the future and that’s the stock market ( and it has to be perfectly timed for your retirement )

This world doesn’t work:
– I had a client called me
– That said, I got back into credit card debt because of Christmas
– Then I got into a car accident and had to spend my emergency fund
– So now I kinda have to restart some things
– And because life is life I don’t recommend this budget

3. My Plan and what I Currently Do
– I split my financial goals intro 3 mission and 6 accounts ( like envelopes)

Mission One: Debt Free
– Initially you save $1000 and then 1% of every paycheck for Emergencies
– You get to the habit of investing automatically by investing 1%
– You pay between 46-26% of all your money towards paying of Debt ( highest apr first and lowest apr Last ) – 3 years faster
– Expenses for needs between 50-70%
– 1% would go to fun
– 1% would go to charity

Once your debt-free: we move into the Wealth Building Section
– Emergencies 10-20% ( until fully funded 6 months worth of expenses)
– Investments 10-20% ( max out Roth ira, then Roth 401k and then taxable accounts)
– Debt 0%
– Expenses 50-70%
– Fun 5% ( you can have more fun)
– Charity 1%

In a few months: you’ll have a fully-funded emergency account
Then you move into the Freedom Section

Emergencies are 0%
Investments: stay 20% ( with 5% being saved in 529 for your kids, in 18 years you’ll have 100k – with that same 48k salary)
Debt: 15% extra towards the mortgage
Expenses: 59% or 54%
Fun 5%
Charity: 1%

Done: House is yours and this took you around 7-10 years to do

Emergencies: 0%
Investments: 25%
Debt: 0%
Expenses 64%
Fun: 10%
Chairty: 1%
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*Some of the links and other products that appear on this video are from companies in which Tommy Bryson will earn an affiliate commission or referral bonus. Tommy Bryson is part of an affiliate network and receives compensation for sending traffic to partner sites. The content in this video is accurate as of the posting date. Some of the offers mentioned may no longer be available. I’m an Accountant but I’m not your Accountant, always review information with your Accountant/CPA and your Financial Advisor.

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