You can view the entire 50-30-20 MoneyPlan series as one document here.

If I had to pick one thing as the single most important piece of advice in personal finance today, this would be it: The biggest source of financial distress, of being forced to turn to debt, of inability to save, is overspending on the large fixed expenses.

If you can bring these under 50% of take-home income, then everything else falls into place. What's everything else? The rest of what your income goes towards can be divided into two major categories: discretionary spending and saving.

You should spend less than 50% of your take-home income on fixed expenses, at least 20% on savings and the rest is discretionary – you can spend it on anything you desire from entertainment, restaurants, to new clothes, to video games, to a big screen TV.

Now, one might argue that saving at least 20% is the most important component, but saving that much is very difficult or impossible to do if fixed expenses are not brought under control. Moreover, as soon as something goes wrong with fixed expenses at the current typical level of 75% you can only cut back your expenses by 25% in the short run to weather the setback. This easily may not be enough, and then there goes your savings. You may have to draw those savings down to zero, and the crisis still may not be over, so then you have to start taking on debt.

With new debt would come new debt payments, which have to be made each month. This would cause your fixed expenses to go up even higher. Suppose that the new debt payments equaled 5% of your take-home income. This would boost your fixed expenses from 75% to 80%, so now you're even farther from being able to meet your monthly expenses, so you have to borrow even more. The vicious circle continues on and on until you're financially ruined.

This is called a debt spiral. And if your fixed expenses are over 50% it can happen all too easily today.


However, if your fixed expenses are under 50%, then you have a lot of room to cut back your discretionary expenses to weather a setback without having to eat up your savings and/or turn to debt.

Suppose your fixed expenses are at 45% of your take-home income. That includes your mortgage or rent, car notes, basic food expenses and anything that you cannot simply cut back on if necessary.

Since nothing else is a fixed expense, all the rest – the other 55% – is discretionary and saving. And discretionary spending and saving can immediately be cut to zero if necessary. Thus, you have a full 55% of your take-home pay that you can cut back anytime to weather a storm, without depleting your savings and/or taking on debt.

This kind of flexibility and resilience is absolutely crucial to have in today's America, but there's more to it than even that. Having fixed expenses less than 50% just makes it a lot easier to stay on budget and consistently save 20% each month because it leaves at least 30% for relaxed, fun, discretionary spending, so you don't always feel deprived.

A pie chart of the 50-30-20 MoneyPlan looks like this:

503020 PieChart