Budgeting Strategies… What Are You REALLY Worth?

  • Warren’s 50/20/30 Rule: Elizabeth Warren proposes allocating 50% of income to essentials, 20% to savings, and 30% for personal wants. This budgeting framework is aimed at balancing financial obligations, savings, and leisure.
  • Practicality Concerns: This article highlights a discrepancy between Warren’s suggested budgeting and the reality that essential expenses often consume over 60% of an average American’s income, questioning the 50/20/30 rule’s practicality.
  • 10/20/70 Alternative: The 10/20/70 Rule as a more feasible option, dedicating 70% of income to all expenses, 20% to debt payments, and 10% to savings, offering a potentially more realistic approach to financial management.

In her book “All Your Worth,” Senator Elizabeth Warren popularized the 50/20/30 budget rule. Warren suggests dedicating 50% of your income to cover essential needs. This includes:

  • Housing costs
  • Transportation costs
  • Groceries, Clothing, and Utilities
  • Insurance premiums
  • Minimum debt payments on credit cards and unsecured debts

Warren also recommends setting aside 20% of your income for savings. She includes various forms of investments under this category, though traditionally, only one of these is considered actual savings.

  • 410k or 403b contributions
  • IRA contributions
  • Mutual Fund Investments
  • Emergency funds in your bank account
  • The purchase of stocks and bonds, as well as
  • Paying more than your minimum required payments on your debt

Warren suggests that with this budget plan, you have the freedom to use 30% of your income on any personal wants or leisure activities, like:

  • Entertainment
  • Eating out
  • Netflix
  • Coffee houses, or
  • Vacations

The issue with Warren’s budgeting method is its lack of balance, which might not come as a shock. Given the challenges politicians face in managing the national budget, it’s somewhat ironic to rely on Senator Warren for personal financial advice.

To get a clearer picture of your financial standing, consider the following:

Data from the US Bureau of Labor Statistics shows that Americans typically need to spend more than 60% of their monthly income on essential expenses.

  • Housing, including utilities, 27%
  • Food 10%
  • Transportation 5.51%
  • Clothing 2.49%
  • Healthcare 6.7%
  • Insurance 8.63%

This adds up to 60.33%, and that’s before covering the minimum payments on your credit cards and other unsecured debts. So, if you’re following Warren’s 50/20/30 budget plan, you’re already exceeding your budget by over 10%.

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A Budget System That Works

There’s a more established and practical method for managing your finances that predates Senator Warren’s claims and academic journey. It’s known as the 10/20/70 Rule.

Under the 10/20/70 Rule, you allocate 70% of your income to essential and personal expenses, including:

  • Donations or tithing, if you choose
  • Rent or mortgage payments
  • Property taxes
  • Payments on student loans
  • Costs for transportation
  • Expenses for groceries, clothing, and utilities
  • Insurance payments
  • Leisure and entertainment, as long as it’s within budget
  • Optionally, additional payments on your debt, beyond the minimum required

This structure allows you to dedicate 20% of your income to cover minimum payments on credit cards and other non-secured debts. The remaining 10% (or potentially more, depending on your debt payments) is yours to save or use as you see fit.

Over time, the money you save will grow due to compound interest. This growth can help you cover 20% of your budget that might otherwise go to interest payments on debts. Considering the average American loses about $4,192 annually to credit card interest alone, adopting the 10/20/70 Rule could significantly increase your savings compared to the 50/20/30 plan proposed by Warren.

The suggestion here is that politicians, including Elizabeth Warren, might prefer constituents to remain financially dependent, potentially ensuring their continued role in governance.

However, by shifting your perspective from limiting beliefs about your financial worth to recognizing your true potential value, you can transform your financial future. It’s a straightforward change in mindset that can lead to substantial benefits.

When you avoid paying interest to others, your money continues to grow, especially if you use it to finance things you’d typically need a loan for. By keeping what you’d lose to interest, which averages about $4,192 annually, and earning a modest 6% return per year, you could amass $154,205 over two decades.

However, remember that investments come with their own costs, like taxes and trading fees. These can eat into your earnings, reducing your final amount. Taxes might take around 2% or more, and fees could be another 1% to 2%, leaving you with approximately $112,640, not $154,205. This estimate also assumes tax rates remain constant over the next 20 years.

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Use Whole Life Insurance

A smarter strategy to keep more of your money away from taxes and investment fees is to invest in Participating Whole Life Insurance. For instance, a healthy 45-year-old American man could use the $4,192 he saves each year to fund such a policy. This could result in $114,000 of guaranteed cash value and a death benefit exceeding $250,000.

This approach not only sidesteps the losses from taxes and fees but also taps into a strategy known to the wealthy: using your own money to maximize returns. Moreover, life insurance offers added benefits, such as providing for your loved ones and leaving a legacy, making it a more comprehensive financial plan.

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However, this kind of thinking might not be popular with the government or fund managers because it encourages financial independence. This might explain why a plan like Elizabeth Warren’s 50/20/30 is promoted over the 10/20/70 Rule, as it keeps individuals more reliant on external financial systems.

Ready to see numbers on what it all looks like so you can be more financially independent? Call us at 702-660-7000.

Dr. Tomas McFieDr. Tomas P. McFie

Most Americans depend on Social Security for retirement income. Even when people think they’re saving money, taxes, fees, investment losses and market volatility take most of their money away. Tom McFie is the founder of McFie Insurance which helps people keep more of the money they make, so they can have financial peace of mind. His latest book, A Biblical Guide to Personal Finance, can be purchased here.