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  • Writer's pictureAsad Reza Nassur

Rethinking the 50/30/20 Budgeting Rule: A Personal Perspective

Disclaimer 1: Please note that these are my personal opinions and I am not a financial advisor.

Disclaim 2: ChatGPT was used to edit this post and modify its structure. Also, I liked its title suggestion more than my initial one (mine was a bit too out there, haha!).

Ever since I came across the 50/30/20 rule of budgeting, which suggests allocating 50% of income to needs, 30% to wants, and 20% to savings, I've found myself perplexed. In my opinion, relying on a mere 20% for savings doesn't seem sufficient. Moreover, the term "savings" itself feels restrictive, implying the need to protect money rather than allowing it to grow. I propose a different approach, where investing takes center stage, offering greater potential for financial growth and freedom.

Reconsidering the Allocation:

Instead of adhering strictly to the 50/30/20 rule, I believe a more effective mix would be either 45/20/35 or 40/20/40 (if practicing frugality). In certain cases, a 35/25/40 split could also be viable. The key here is to emphasize the "investing" portion, aiming for a range of 35-50%, which is the sweet spot for financial growth. It is important to note that this allocation assumes the absence of debt. If you have debt, I recommend a modified breakdown of 40/10/30/10 for needs/wants/investing/debt repayments. Adjustments may be necessary if your debt interest rate exceeds 1.3-1.6 times inflation or if your debt repayments exceed 10% of your income. In extreme cases, where the debt interest rate surpasses 1.8 times inflation, it becomes crucial to prioritize eliminating the debt after setting aside an emergency fund of at least 6 months. I will delve further into emergency funds in a future post.

The Importance of Investing:

Why allocate more than 20% toward investing? With the rise of inflation and escalating costs, salaries have failed to keep pace, resulting in a shrinking disposable income. This trend is unlikely to improve in the long run and may even worsen. Consequently, it becomes imperative to allocate a larger percentage of income to maintain your standard of living and prepare for future healthcare expenses. (Note: Basic Health Insurance should take precedence over investing if you don't have coverage yet.) Investing more provides you with greater financial power earlier, offering the freedom and flexibility you desire. Personally, I aspire to retire at 45 or 50, rather than waiting until the traditional retirement age of 65. By retirement, I mean having the freedom to explore various options without significantly compromising my standard of living.

Budgeting without Rent or as a Freeloader:

I conducted a quick Google search and found little to no guidance on budgeting when you don't have to pay rent or when you're living with family and essentially freeloading (guilty as charged!). In such cases, I suggest flipping the 50/30/20 rule to a 20/30/50 allocation for needs/wants/investing. If you practice frugality, your needs might not even surpass 20%, allowing you to allocate those funds towards savings or wants, depending on your short-term goals. Since you're already meeting the 50% investing threshold, you could even push it to 90% if that brings you joy. Personally, I believe it's important to allocate 15-20% toward wants, as indulging in them creates a positive feedback loop that helps maintain motivation.

Exercising Restraint and Impulse Control:

While spending on wants can be enjoyable, it can also spell disaster without proper impulse control or personal limits. Treating wants like medicine, where you adhere to a prescribed amount, is essential. However, as you become your own doctor, there will be a learning curve, and a month or two of falling off the wagon shouldn't discourage you. Allocating one month in the year to skip investing and indulge in wants is acceptable (I personally do this). The key lies in portioning and exercising self-restraint. Remember, falling off the wagon too frequently will leave you with bruises you weren't prepared for.

Investing Strategies:

Regarding investments, it is advisable, especially if you're under 45, to opt for riskier options such as equity investments, corporate bonds with slightly higher risk ratings, or business investments. As you grow older, transitioning towards safer options like government bonds while maintaining a blend of equity and debt becomes more prudent. Of the three riskier options, the third carries the highest risk, as the first two bottom out at zero, while the third can potentially leave a larger dent in your finances. The first two options offer a combination of protection and growth, while the third represents a form of "potential" wealth creation. Lately, I've become more intrigued by the wealth creation aspect and have been exploring it through glimpses. I will delve into investing in greater detail in a future post.

I hope this post has provided you with some fresh ideas on how to approach the positive cash flow that enters your account each month. Money should not be your master, but to make it work for you, it requires planning and monitoring. Treat it like a plant that you nurture, envisioning it growing into a fruitful tree in the future.

I eagerly await your thoughts on how you perceive money. Feel free to share your insights in the comment section below. If there are any specific topics mentioned here that you would like me to delve deeper into, please let me know.

Keep strong and keep smiling. Until next time!

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