Here's how personal finance advice gets it wrong

In the world of personal finance, there are certain tried-and-true recommendations: Spend less than you earn. Put money aside for a rainy day. Invest for retirement. This advice is timeless and can help you get on the path to financial wellness. The goal is to have a safety net to fall back on so you can take care of yourself, no matter what life throws at you. 

But other personal finance recommendations are well-meaning and in desperate need of an update given the current economic reality for many people.  

50/30/20 budget 

Introduced by U.S. Sen. Elizabeth Warren, the 50/30/20 budget states that consumers should spend 50% of after-tax income on needs, 30% on wants and 20% on savings. The guideline provides an easy-to-understand benchmark, but in practice it doesn’t really work, according to some.

“The 50/30/20 rule is outdated and out of touch…The national average cost of housing and transportation alone is now 51% of household income,” said Jamie Strayer, creator and executive producer of Opportunity Knock$, a television series on PBS that focuses on finance and economic mobility. “This advice is so unattainable, I compare it to a doctor prescribing a starvation diet to someone with diabetes. The advice does more harm than good.”

What to do instead: Not everyone can fit their budget into these strict percentages and categories. What you can do is try to focus on the three major expense categories, housing, transportation and food. Lowering these costs can make the largest difference. You can also check out resources like FindHelp.org to get free or low-cost food and housing and work with a nonprofit credit counselor to get guidance on your budget. 

Emergency funds 

The standard advice is to save three to six months' expenses for your emergency fund. The thought is that if you’re unemployed, get ill or have a drop in income this amount can keep your head above water while you figure out what’s next. 

For many starting out on their personal finance journey, saving three to six months of expenses is already daunting. And if you can save that amount and do “everything right,” it still may not insulate you from everything. 

Consider the pandemic, which led to high unemployment numbers and affected many people’s livelihoods for longer than three to six months. On average, there were 20.6 million unemployed Americans as of the second quarter of 2020, according to Bureau of Labor Statistics (BLS) data. During that time, the unemployment rate was 13.0%, the highest level recorded since tracking began in 1948. 

BLS data also shows that on average, unemployment lasts 22.6 weeks or about five months as of September. Given historical events and current economic realities, having more than three to six months’ worth of expenses sounds like a better safeguard. But a projected 62% of Americans were living paycheck-to-paycheck as of January, according to a report by PYMNTS Intelligence, making it hard to save anything for emergencies. 

What to do instead: Save what you can into a high-yield savings account, so your funds are both accessible and earning interest. Consider your support network and other resources that go beyond the financial. In case of an emergency, could you stay with your parents or a friend? Do you have mentors or friends who can help if you’re dealing with a layoff? Are there local nonprofit or community resources you can take advantage of? 

Student loans 

Traditional personal finance advice says students shouldn’t borrow more than their projected salary after graduation. The recommendation is a good guideline, but is getting more difficult to do in practice. 

Data from the College Board shows the average cost of attending a four-year school in 2023-2024 starts at $28,840 and goes up to $60,420, depending on whether the student is in-state or out-of-state or attends a public versus private college. These are the total costs for one academic year. So if you consider these amounts for a four-year degree, costs can easily be over six figures. 

As of Q3 2024, 2.4 million federal student loan borrowers owed between $100,000 and $200,000, while one million owed more than $200,000, according to Federal Student Loan Portfolio data. 

Compare this to the average salary for the class of 2023, which is $64,291, according to the National Association of Colleges and Employers (NACE). The standard advice of only borrowing your projected salary out of college is getting further out of reach, bordering on completely out of touch. 

What to do instead: Consider starting at a community college or learning a trade. Fill out the Free Application for Federal Student Aid (FAFSA) to review your options. Look into student loan forgiveness options available through the Public Service Loan Forgiveness (PSLF) program or income-driven repayment (IDR).  

Buying a house

Homeownership is a major part of the so-called “American Dream.” Buying a home has often been seen as a surefire path to wealth, with some going to the extreme and saying “Renting is throwing money away.” 

But paying for a roof over your head surely isn’t throwing money away. Not only that, but Realtor.com found that it’s cheaper to rent rather than buy in the 50 largest U.S. metros. 

Americans who do want to pursue homeownership have to deal with rising costs and environmental factors that can affect their investment. As of August, the average sale price of a new house in the U.S. stood at $492,700, according to data from the Federal Reserve Bank of St. Louis. 

“Homeownership has traditionally been one of the safest ways to build wealth and pass it on to the next generation…That was before the mashup of climate disasters, disappearing insurance, the potential of a real estate industry meltdown and population decline,” Strayer said.

Some home insurance companies are dropping out of states like California and Florida. Those with policies in place are dealing with sky-high rate increases. 

Instead of saving a large amount of money for a down payment on a house or paying mortgage payments in a high interest rate environment, investing in the stock market may be a smarter idea. 

“The stock market’s liquidity and compounding growth give it the edge over the slower appreciation of property values, particularly when accounting for homeownership maintenance and taxes,” Strayer said. 

What to do instead: Compare monthly housing costs if you rent versus buy. Consider taxes, insurance, repairs, etc. if you want to buy a house and how much interest you’ll pay during your repayment term. If saving while renting, invest any surplus in the stock market. 

It’s not only personal responsibility 

Personal finance advice is prescriptive. The idea is if you follow the advice, everything will work out. What personal finance advice gets wrong is that it only works for certain people, such as the upper classes who have any discretionary income in the first place. 

Not everyone starts on the same playing field and not everyone has access to the same opportunities. Many personal finance recommendations are outdated and while they’re meant for everyone, not everyone can follow the advice.

Still, many think that if you simply work hard you’ll succeed. And if you don’t succeed? It’s a failure of personal responsibility. Standard personal finance is not designed to work for everyone when there are systemic challenges like high housing, education, and childcare costs and a healthcare system that leads to the majority of bankruptcies (66.5%). 

We put the onus on individuals to master their finances and make it work. Yet many of the issues making personal finance inaccessible are out of our control. With the advice out of reach, people think it’s their fault and they’re “bad with money.” Are we bad with money or is the money system that’s set up just bad?