The 50/30/20 rule : Will it break your early retirement dream?

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Budgeting can be daunting;  Especially, when you are starting!

You may not know how to begin. How to end? Is this the right way of doing it? Many Self-doubt rises within us.

In pursuit of the perfect budget plan, you may wear yourself out.

In fact, Budgeting is never meant to be complicated. Most of the complexities of budgeting apps were broken by the 50/30/20 rule simplicity.

The 50/30/20 rule is a great way to begin, but does it help you to achieve your early retirement dreams?

In this article, we are going to discuss more on the 50/30/20 rule and understand its true potential when it comes to achieving early retirement.

Where did the 50/30/20 rule come from?

The 50/30/20 rule comes from the book ” All your worth: The ultimate lifetime money plan” written by US senator Elizabeth Warren and her daughter Amelia Warren Tyagi.

Referencing over 20 years of research, the duo authors concluded that you don’t need a complicated budget to get your finances in order.

All you need to do is balance your money across your needs, wants, and savings by using the 50/30/20 rule.

What is the 50 30 20 rule mean?

The 50/30/20 rule is an easy budgeting method which created to manage your money effectively, but most importantly to avoid complexities.

Since the 50/30/20 rule is simple to adopt and offers only 3 areas to focus on, it keeps you stress-free and saves you time from digging into minute details of your spending.

The basic rule of thumb in the 50/30/20 rule is splitting your post-tax monthly income into three categories:

  • 50% for needs
  • 30% for wants
  • 20% for savings or pay off debt.

Regularly keeping track of your spending in these 3 areas helps you to manage your money effectively. Also, you see your savings grow steadily.

If you have never done a budget before, the 50/30/20 rule is a great way to begin and helps you to bring spending habits in order.

It also helps you to reach your financial goals or pay off your debt steadily.

How to apply the 50/30/20 rule?

The 50/30/20 rule simplifies your budget by splitting your post-tax monthly income into three spending categories: needs, wants, and savings or debt.

Knowing exactly how much to spend on each category makes it easier to stick with this rule. Here’s what it looks like.

50% income on needs:

Needs are the expenses that are necessary for your survival. Avoiding such expenses would make your life difficult to live.

50% of your income goes into the needs category: They are

  • Grocery bills
  • Utility bills
  • Rent/Mortgage Payment
  • Insurances
  • Transportation

So if your post-tax monthly income is $4000, ideally $2000 would be allocated in your budget to spend on the needs category.

30% income on wants:

With 50% of your income going to needs, Now 30% of income is allocated to your wants.

Wants are things that you desire to have or spend. It is not essential as needs, but it’s something to you chose to spend to maintain your quality of life. You can also live without it.

Some examples of wants are:

  • Dining out
  • Shopping (New clothes, shoes)
  • Travel or vacation
  • Entertainments

Using the above income example, you would be allocating $1200 in a month to your wants category.

Also if you feel like, you are spending too much on your wants. You can always cut back and put the money into your savings or something worthwhile.

If you are confused about wants and needs, ask yourself ” Could I live without it?” If the answer is yes, then you can conclude that its a want.

Helpful article: 3 tips to know your want vs need to reach financial freedom

20% income on savings:

With 50% of your monthly income going towards your needs and 30% allocated to your wants, the remaining 20% can be put towards achieving your savings goals or paying back any outstanding debts.

Although minimum repayments are considered needs, any extra repayments reduce your existing debt and future interest, so they are classified as savings.

Consistently putting aside 20% of your pay each month can help you build a better, more durable savings plan.

Some example of savings are:

  • Building an emergency fund
  • Retirement plan
  • Down payment for a house.

And it’s impressive how quickly the savings can add up. If you bring home $4000 after tax each month, you could put $800 toward your savings goals. In just a year, you’ll have saved close to $9600!

Is the 50/30/20 rule good?

Is the 50/30/20 rule good? The short answer is yes and no.

If you are a beginner, starting to budget then the 50/30/20 rule is a great and simple way to build a habit of savings and managing money.

But if you are a frugal spender and looking for aggressive ways to save more than 20% of your paycheck, then this rule might not serve your purpose.

Why the 50/30/20 rule is not good for early retirement?

If your goal is to retire early or you are considering the FIRE retirement, Your bare minimum goal is to save 25x of your annual spending by adhering to the 4% withdrawal rule.

For example, If your annual spending is $ 50,000 per year, by saving 25X of your annual spending you can achieve early retirement.


(Annual spending * 25)= retirement portfolio

$50,000 * 25 = $1.25 million.

Also if you are withdrawing 4 % from $1.25 million ( $1.25 * 0.04= $50K), you can take out your annual spending amount of $50K without depleting your portfolio on your retirement years.

But if you are following the 50/30/20 rule to accumulate the $1.25 million portfolio, it would take a good 36 years to achieve it.

In these 36 years, you would be working to build your nest egg. Assuming you are entering at the age of 25 into the workforce, you would be retiring at 61 when you save 20% of your income.

Our savings percentage is correlated with our working years. Please refer to the below chart:

shockingly simple math

If you looking to retire early, you would be better off by increasing your savings rate than adhering to the 50/30/20 rule.

This above chart is originally coined by famous personal finance blogger Mr. Money Mustache.

Want to know more: The Shockingly simple math behind early retirement

What’s the solution?

The 50/30/20 rule is a great way to begin your financial discipline.

Once you get the momentum and confidence, you can save at an incremental rate in line with your income rises.

Trying to increase your savings rate by 5% a year, can bring down your working years significantly to achieve early retirement.

If you are someone loving your job, is happy with yearly vacations and considerably saving a part of your income, then the 50/30/20 rule stills holds well for them.

Final Thoughts

Every individual needs differ, the 50/30/20 rule is not to fit for everyone.

If someone lives on paycheck to paycheck, savings of 20% of their income could be impossible for them.

For a frugal person, savings 20% could be easy peasy! They would be aiming to save 50% or more of their income.

At last, there is no better judge than yourself to decide your financial future.

Thank You for reading!

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