Ever heard of the 50-30-20 rule? I keep seeimg these financial advisors bring this up and I hate it. I also worked in a bank where we gave this unrealistic advice to help our clients budget.
After taxes you should spend 50% of your pay on needs, 30% on wants, and 20% on savings.
Let’s math shall we. Average salary in US is just under 60K or about 42K net. Average rent is just above 2k a month or 24k a year. Well I hope you’re happy living in 85% of an apartment, because that’s all your Needs can afford.
But what about your other “needs”?
Let’s just file those under wants. You want food to survive. You want the other 15% of your apartment and electricity so you don’t die in this record heat. You want transportation so you can work your average job.
Then I guess savings are things that are saving your life, like doctor visits or insurance or medicine or brakes on a car.
I get this is an oversimplification of everything, but we have to wakeup and realize this current situation is not sustainable in the long run for the vast majority of Americans. You know who knows that? Congress. That’s why they pay themselves $174,000 a year or about 3 times the average for a far below average performance.
I assume this rule is a way a “tool” (50-30-20) used as a propaganda tool to abuse the poor.
This is because underwriting a loan three things are considered. The asset that will be acquired, your ability to repay, and your willingness to repay.
In the scenario that you outlined that person would have 20% digressionary income. If they reduce their spending by 10% on “wants” they could hit the 30% the banks like to see. However this number is after you assume the payment. This would likely put many in 10%-20% range. This is considered another risk that could be countered by additional interest hikes. The banks also want you to have as close to that 30% as possible. This is because you have the highest chance not to declare bankruptcy. You will also have a enough room your likely to continue to be solvent to pay the debt. Also 30% is really close the acceptable limit, this way they are given cover to gouge you as a credit risk. This is why credit reporting agencies must have erroneous data all the time. This gives them power to judge your credit worthiness with “legally” sound dubiousness. This is the rational to give you a “score” that then allows the bank to screw you for decades in some cases.
There needs to be a class action lawsuits regarding credit agencies, along with legally binding public alternatives. Also if a few people go into bankruptcy and squash the debt the bank counts this as a loss. This then reduces how much taxes they owe. So many times the bank risk is very little.
Two things people don’t get:
Is how much money is really flying around.
Politicians and elites use your financial ignorance to screw you blind. For example when they say we can’t pay for something. The only way you could believe that is if you don’t understand our financial system. You can tax speculation until you kill a market. To put it to you bluntly we are far far FAR from a concern of this type. In fact the thing that threatens the system is the total control the financial sector has over the political system.
How there is a science to extraction of wealth from the “middle” class. Hard works is a suckers game in their eyes.
I am not saying lets all get them because that is what they want. What we must be diligent and measured in how we flog them publicly for their bad behavior. They will fight tooth and nail against this but we must lead around by the ear.