Money BasicsManaging Money

The 50-30-20 budget plan

For those who don’t know, the 50-30-20 budget plan is an American concept that seeks to save money and budget your money smartly. After taxes, your income should be divided into: 50% on essential needs; 30% on wants; and 20% on paying off your debt or setting aside funds in case of an emergency.

Some Filipinos may think that this form of budgeting isn’t feasible for the everyday person. This is because the salaries and cost of living in this country vary from that of the United States.

The 50-30-20 budget rule is not only applicable to Filipinos’ everyday lives, but also a good budget plan to practice for better savings.

What is the 50-30-20 budget plan?

Coined by United States Senator and Harvard bankruptcy expert Elizabeth Warren, the 50-30-20 rule forces you to divide your spending on percentages. After taxes:

  • 50% of your income should go to essential needs (mandatory/minimum bills payment, groceries, transportation, medicine, etc.);
  • 30% should go to your discretionary expenses, which are not that essential to your survival, such as gym memberships, entertainment, unnecessary travel, designer clothing, etc.;
  • 20% should go to savings and debt payments. Out of the 20%, ideally, at least 10% should go to savings, and debt payments for credit card and loans.

This rule, of course, is not set in stone. For example, if someone in the US has student loans or medical debt, their budget for living expenses and minimum bills and debt payment may be insufficient. In this case, the best option is to decrease discretionary expenses, from 30% to maybe 15%.

The point of this budget plan is that you’re spending based on what you have, not on any other arbitrary measure like other budgeting plans. It’s a flexible budgeting option, so you can adjust the percentages as needed.

Budgeting for Filipinos

There are two main reasons Filipinos are quick to dismiss the 50-30-20 rule. First, the cost of living in the United States is different than in the Philippines, so the percentages may seem way off if you’re thinking about their needs and ability to save.

Let’s say if you are a fresh graduate, you earn P18,000 monthly after deductions. This means that P9,000 will go to needs, P5,400 will go to wants, and P3,600 will go to savings.

If you were to live independently and have no other sources of income, P9,000 a month spent on rent, food, transportation, utilities, and other expenses is not enough. So, you would have to reduce expenses on wants and savings, disrupting the 50-30-20 rule.

The second reason many Filipinos do not see the need for the 50-30-20 rule is cultural differences. In the US, most people are expected to either leave their parents’ home by the age of 18 or start paying their parents rent. However, in the Philippines, where family ties are highly valued, young adults are not expected to leave the nest until much later in life–and that’s assuming they leave at all.

What this cultural difference does is that, from a young adult age, Filipinos have mixed incomes and are not fully financially independent. When it’s time to move out, they have unrealistic budget breakdowns or have developed bad spending habits making it more difficult for them to stick to a 50-30-20 budget.

Another cultural aspect that affects how Filipinos save and budget is the common trait of being “ningas cogon”—it’s the attitude of doing well only during the beginning or the lack of sustained perseverance in whatever pursuit. When it comes to following a budget, Filipinos tend to declare proactive habits such as saving more, especially during the start of the year, and will eventually regress after some time.

Getting a large amount on their payday, for example, usually serves as a convenient excuse to spend on high-ticket items as a reward, which could have instead gone to one’s savings.

Modified 50-30-20 budget plan for Filipinos

Even if the original 50-30-20 rule cannot be fully applied into the context of the Philippines, it can be modified into something we can digest and practice more easily. Here’s a suggestion:

  • 50% goes to essential spending with about 25% on mortgage or rent. This can mean fresh graduates may split rent with a roommate.
  • 30% goes to lifestyle spending or discretionary expenses.
  • 20% goes to financial priorities. This can include savings, investments, funds, and other financial priorities that don't fall under essential spending.

Like the original 50-30-20 rule, this is a flexible budgeting plan that can be modified to fit your needs. It offers a more realistic budget plan in a Filipino setting, allowing you to understand what percentage you can spend without sacrificing important needs.

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