The 50-30-20 Budgeting Rule Hack: Get Richer Faster
A number of people may look at budgeting as a pain. On the contrary, it is one of the most important personal financial habits that is central to money management. The 50-30-20 budgeting rule for example, exits to do only one thing; to bring order and transparency to all your traceable after-tax income and expenses.
This 50-30-20 budgeting rule is one of many budgeting frameworks existing today. It can make you rich with a few simple hacks and optimizations such as the tips and ideas displayed below.
A Better 50-30-20 Budgeting Rule ?
This classic budgeting rule may need an innovative overhaul down the line. As much as it remains a great budgeting rule of thumb method that works, further adjustments would stretch it to its maximum benefit.
The question is why is there a need to change something if it’s already working? Seriously, with long term use, also come long term observations. The 50-30-20 budgeting rule should be seen more as an open source project. We ought to ensure the longevity of this brilliant budgeting planner through contributions.
The Original Budget Anatomy
The original plan for the 50-30-20 budgeting rule was to allocate 50% of your after-tax income (includes side hustle income) to paying for your needs (all must-have necessities of life). Then 30% for your wants (those nice-to-have items). Then finally, a 20% portion going towards savings (Investing, debt repayments, rainy day fund).
The proponents had originally agreed that the next more important items to plan for – besides your essential expenses (needs), are your wants. Meaning wants are ranked higher than savings. This drive forces people to think of saving money and investing as an afterthought. That should have been the most important variable or section in a functional 50-30-20 budgeting rule plan.
The New Budgeting Hack
Minor Adjustments
As we make small changes to the 50-30-20 budgeting rule, it should look more like 30/50/20. It appears as if we are now ranking the Wants/Needs/Savings in that sequence. Not quite. The first 30% has now become the savings allotment. The next 50% is still for our Needs, and the final 20% is for Wants. Reduced from a high of 30%.
Prioritize Savings
Savings is the highest priority for me. It takes up 30% (or even more), followed by my needs at 50%, them my wants pushed to last at 20%. Within the 30% savings threshold, 10% of that is fixed into my financial freedom fund. That amount should compound in a long-term equity investment of your choosing. This pay-yourself-first mentality will now give room for the rest of our after-tax pay check to be distributed into our 50-30-20 budget, now called 30-50-20 budget.
Wealth Engineering
If there are any outstanding personal debts, up to 20% of the (30% Savings) remainder will go into paying down that debt. (I agree with the debt snowball method by Dave Ramsey). After clearing any loans, that 20% (from the 30% of savings) could be used to build a 6 month emergency fund reserve. After which the whole 30% of savings, could be set aside as war chest cash reserved for investing (using Dollar Cost Averaging).
Million Dollar Opportunities
A Mindset Shift
This brings us to the magic question. Can someone become rich through budgeting this way? Certainly. First of all, we modified our 50-30-20 budgeting rule, into a 30-50-20 budget hack. The above adjustment keeps us focused on becoming debt-free, and also building an investment nest egg.
Systematic Acquisitions
Cash flow for onward investing was released as we tinkered with the 50-30-20 budgeting rule. We can use the cash to buy more of our equity positions. This should be a predetermined goal from our Personal Financial Plan to build our financial freedom fund with systematic monthly stock purchases. Use Dollar Cost Averaging to minimize the cost impact from volatility.
The Vulture Investor Mentality
A vulture investor is one who waits until all hell breaks loose before they invest. Meaning you can sit on the sidelines and make minimal share acquisitions with 10% to 30% of your purchasing power. The rest of the cash should be in a high-yield non equity investment. You should be looking out of the window every now and then for record lows or stock market crashes. As risky as this may sound, you can just track the S&P 500 Index for dip opportunities – rather than individual stocks. There are many stocks that do not recover after a record low. So stay informed and do your own due diligence.
Note Worthy: Beginner’s Guide To Stocks: 10 Tips To Note Before You Invest
Afterthoughts On The 50-30-20 Budgeting Rule
The 50-30-20 budgeting rule has brought some financial sanity to many homes. A systematic and minimalist approach to managing your money. A focus is placed only on Wants, Needs, and Savings – in that order. However, the new optimized twist we called 30-50-20 budget hack will therefore take you further along the financial freedom journey. You will achieve your early retirement goal faster.
Are you already dedicated to a personal monthly budget? Please share in the comments below.
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