Why the 50-30-20 budget rule is out of reach for most Americans

Why the 50-30-20 budget rule is out of reach for most Americans

An often overlooked principle of personal finance is that it is, well, personal. Because your financial situation is not the same as that of your friends or neighbors, the advice you follow will usually be different as well.

Still, some recommendations make sense to many people, like gravitating toward low-fee funds or prioritizing your emergency savings.

But even advice once thought to be proven and true is worth revisiting, especially when financial conditions change. Take the classic 50-30-20 budget rule, which recommends allocating 50% of your taxable income to living expenses, such as housing and transportation; 20% for savings goals, such as investing for retirement and paying down debt; and 30% to everything else.

Budgets are stretched these days, which makes the 50-30-20 rule harder to follow. Over the past two years, thanks to soaring inflation, the consumer price index, which measures the price growth of a basket of consumer goods, has increased by 13%. And with salaries not keeping up, it’s worth asking whether a classic budgeting model still applies to the average American.

Calculation of Average US Net Income

Let’s calculate some numbers. For a single American, the median annual income is $57,200, according to the Bureau of Labor Statistics. But as anyone who’s ever collected a paycheck knows, a few line items get deleted before the money gets to you.

First, federal taxes. A single filer earning a salary of $57,200 and claiming the standard deduction would have an obligation of $4,985, according to the IRS’ tax withholding estimator tool.

If you live in one of the 41 states or the District of Columbia, you will also have to pay state income tax. In total, state and local taxes average 11.6%, according to the Tax Foundation. On a median salary, you pay $6,635.

Assuming you’re not self-employed, you and your business share the Social Security and Medicare bill. Your share is 6.2% for Social Security and 1.45% for Medicare. It’s $3,546 and $829, respectively.

Also, if you have medical coverage through your employer, you will have to pay insurance premiums. Among workers who face an annual deductible for individual coverage, the average is $1,763, according to the Kaiser Family Foundation.


  • Median gross salary: $57,200
  • Federal tax liability: – $4,985
  • National and local tax liability: – $6,635
  • Social Security: – $3,546
  • Health insurance: – $829
  • Health insurance premium: -$1,763
  • Net income: $39,442

Where the 50-30-20 calculations get tricky

Once everything is taken out of their paycheck, someone earning a median salary ends up with an annual income of $39,442, which equals $3,286 per month. Let’s see how it looks divided.

  • Living expenses (50%): $1,643 per month
  • Savings (20%): $657 per month
  • Everything else (30 %): $986 per month

You don’t have to look far to realize that some of these numbers seem unrealistic. That $1,643 will barely cover the national average rent — $1,495 — for a one-bedroom apartment, according to rental platform Zumper. Additionally, the average single-family home spends about $172 per month on utilities, according to EnergyStar.gov.

Need a car to go to work? The average monthly payment on a used vehicle is $526, according to Experian, plus you can expect to pay $150 to $200 per month on gas, per JD Power.

That puts our hypothetical budget at around $2,400, and they still have to feed. The U.S. Department of Agriculture’s “thrifty” food plan prescribes a monthly cost of $302 for men ages 20 to 50 and $241 for women of the same age. The agency recommends increasing these figures by 20% for people living alone.

Added together, the total is just short of erasing not only the 50% for living expenses, but also the 30% for everything else. And think about how much “everything else” you have in your life.

How to budget when money is tight

It is therefore not surprising that in times of need, Americans are unable to set aside the 20% recommended by financial professionals. In fact, the average personal savings rate in the United States is just over 5%, according to the St. Louis Fed.

If you’re one of the legions of Americans looking to get their budgets in order and increase their savings rate, forget the 50-30-20. Start by making sure you can make ends meet.

From there, focus on what Rachel Camp, Certified Financial Planner and owner of Camp Wealth, calls “needle movers”: increasing your income and reducing major fixed expenses.

However, this may be easier said than done.

Increasing your income probably means taking a scramble or earning a raise at your current gig — two big asks if you’re already stretched.

In terms of cost cutting, consider measures such as adjusting your living situation, either by downsizing or taking on roommates, or rethinking whether you need a car in the city where you live, if you can.

For now, these moves may seem impossible. Your budget may currently look less like 50-30-20 and more like 90-10, with just about all you have for living expenses and the rest for occasional luxuries.

Once you know what you need to live on, try to spend some of your income on financial goals, even if you’re at 85-10-5. “Even if you can invest $20 a month, that’s how you start,” Ramit Sethi, a self-made millionaire and host of “How to Get Rich,” recently told CNBC Make It.

Set this money to automatically come out of your salary each month. The hope is that as your salary increases, you will be able to rake in a higher percentage of your income.

Try to get to the point where you flip the budget: automatically set aside 20% to meet your goals each month, pay your living expenses, and then spend the rest of your money however you see fit.

DON’T MISS: Want to be smarter and more successful with your money, your job, and your life? Subscribe to our new newsletter!

Get CNBC’s free report, 11 ways to tell if we’re in a recession, where Kelly Evans reviews the main indicators that a recession is approaching or has already begun.

Check: These 5 graphs show how much 2 years of inflation really cost you

How a 26-year-old woman making $27,000 in Seattle, Washington spends her money

Leave a Comment