I’m currently studying for my CFP (Certified Financial Planner) designation and one of the first things we learn is just how much your clients should be saving & spending. What I’ve come to learn is that people like benchmarks and formulas – one of the most frequent questions I get asked is, how am I doing?
It's never easy to answer this question – after all, the key to personal finance is that it’s PERSONAL. My situation is different than yours which is different than anyone else on the planet. So there is no hard & fast rule to say just how you’re doing. But nonetheless, we need something to say you’re going to be okay or you’re completely off track. Enter the 50/20/30 rule.
The 50/20/30 rule became popular when Senator Elizabeth Warren published her book, All Your Worth. It’s formula designed to answer the question, how should I be spending my money? What it says is that 50% of your after tax income should be spent on your basic living expenses – what you need to survive on a monthly basis – rent, mortgage, utilities, groceries, etc. 20% goes towards your future self in some capacity – contributing to a 401k, building an emergency fund, overpaying student loan debt. Then your 30% is your fun money – for you to spend on whatever gives you happiness, fulfillment & productivity in life.
So why do I think this rule is bullsh*t? Well if you’re one of the examples in my CFP book that lives in the South or the Midwest and spends $800/month on your mortgage, then sure, this rule works great. But if you’re living in the great city of New York, you can pretty much throw this formula right out the window.
We live in one of the most – if not THE most – expensive places in the world. Just how $$$ is it? The Council for Community & Economic Research and Kiplinger released research in 2019. Some of the key findings…
Awesome. Based on this data, it seems bananas to me that we can cover our basic living expenses on 50% of our after-tax income. So how do we live our best life now, while saving to live our best life in the future? Enter my new rule…Focus on the 20.
What it says – spend 80% of your income on whatever you want. If your rent is 50% of your paycheck, if you consider your $250 gym membership to be a need & not a want (I do!) or if you consider Seamless to be part of your grocery bill, so be it! That’s part of living in NYC.
Instead of worrying about how we’re spending, let’s focus on how we’re saving – the 20%. Build your budget to get your savings to 20% of your income. Here’s some ways we we can get there…
So let’s embrace this crazy expensive city that we live in and focus hard on that 20% in savings. Your future self will thank you.