The 50/30/20 budgeting rule has long been the gold standard. According to this budgeting rule of thumb, you should devote 50% of your after-tax income to needs, 30% to wants and 20% to savings.
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However, many Americans do not actually stick to this rule. A recent Talker Research and EarnIn survey of Americans who earn $75,000 a year or less found that the average respondent put 64% of their income toward needs, 16% toward wants and 16% toward savings.
Here’s why Americans are ditching the 50/30/20 budgeting rule — and why this might be a mistake.
Is the 50/30/20 Budget Still the Ideal?
While the 50/30/20 budget may be a helpful guide, it won’t work for everyone’s budget.
“At the end of the day, you don’t have to stick to any particular budgeting rules like the 50/30/20 rule, as long as you find a way of creating and managing a budget that works for you,” said Erika Kullberg, personal finance expert and founder of Erika.com.
“While that study shows some budgeters follow a similar, but different method than the 50/30/20, they could benefit from focusing more on saving and less on wants.”
The biggest issue, however, is that many Americans are having to devote too much of their budgets to “needs.”
“The key here is to lower those ongoing expenses that can weigh down your budget each month,” Kullberg said. “Small things like shopping around for new car insurance quotes and canceling the bulk of your entertainment subscriptions can add up. You need to find ways to lower your essential spending so more money can go toward savings goals or paying off debt each month.”
Bobbi Rebell, CFP and personal finance expert at BadCredit.org, agrees that devoting 64% of income to needs and less than 20% to savings is not ideal.
“The question for each person is: How do you define needs?” she said. “It might make sense to go through and think about how they might redefine needs if they lost their job — would everything still stay in that ‘needs’ bucket? Could they pull just 4% into the savings bucket? If not, could they aim to do 1% more each month until they get to 20%?”
However, Rebell acknowledges that the 50/30/20 budget may simply not be feasible for everyone.
“The split reflects the tough reality for many Americans in what is a very expensive inflationary environment,” she said. “In other words, given the circumstances, this is just how it is for so many Americans who are trying so hard to make ends meet.
“It is also important to note that 16% in savings isn’t that far off from a goal of 20%,” Rebell continued. “The ‘wants’ is where this theoretical person is really cutting back, and it would be tough to ask them to cut back even more.”
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How To Get Closer to a 50/30/20 Paycheck Split
If your goal is to get as close as possible to the 50/30/20 guidelines, there are some steps you can take to get there.
“There are two basic ways to approach it — redefine what goes in each bucket or increase income, because the ‘wants’ bucket is already below optimal,” Rebell said. “It [might] make sense to reframe some needs. A good example might be a gym membership. We might define it as a ‘need’ because we want to stay in shape, but in reality we can exercise for free.
“The other way to move the needle is to increase income and dedicate that additional revenue to boosting savings first, and then increasing the amount dedicated to wants.”
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This article originally appeared on GOBankingRates.com: Americans Are Ditching the 50/30/20 Budget: How They Actually Split Their Paychecks
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