1.Back in 2006, Warren—now a Democratic Senator from Massachusetts, then a Harvard Law School professor—popularized the 50/30/20 rule, detailed in the book All Your Worth: The Ultimate Lifetime Money Plan.
2.In this model, half of your income goes towards “needs” including your rent or mortgage, utilities, car payment and so on. An additional 30% goes towards “wants”—that is like vacation flights or “upgraded” expenses, such as the ad-free streaming package.
3.The remaining 20% is for socking away in an emergency fund or retirement account, or to pay down high-interest debt such as credit card balances.
4.It sounds great in theory, but in an economy where housing costs alone can easily consume half a paycheck—particularly for young adults earning entry-level income—it can feel difficult.
5.“It’s important to have rules of thumb and structures that can help guide us and get things organized, but there aren’t any rules that are written in stone, and that’s important to know—that it’s never a concrete situation. It’s important to be flexible,” says Kevin L. Matthews II, founder of the financial education firm BuildingBread.
60 is the new 50—especially in an expensive city
6.“For someone making good money in a reasonable cost of living area, that rule works fine,” says Elizabeth Pennington, a senior associate at the financial planning firm Fearless Finance. “Where it breaks is for most of my clients living in high cost-of-living areas.”
7. For this reason, Pennington says she encourages clients to embrace the idea of the 50/30/20 formula without applying it as a mandate. “A rule of thumb is meant to be an entry into the conversation and less an end-all, be-all of what we’re trying to achieve,” she says.
8.According to Moody’s Analytics, while incomes have climbed by 77% since 1999, rents have soared by 129%. Nationwide, average rents equal 30% of median income, and young adults in particular are feeling the financial squeeze of high housing costs.
