Getting your money in order can feel daunting. Countless budgeting methods exist, yet the 60-20-20 rule stands out for its simplicity and effectiveness. This strategy, rooted in the allocation of after-tax income, champions a balanced approach to managing finances.
Key Takeaways:
- The 60-20-20 rule simplifies budgeting by clearly dividing income into categories of needs, savings, and wants.
- Prioritizes savings, encouraging a forward-looking approach to personal finance, and working towards your financial goals.
- Provides flexibility in non-essential spending, making it easier to stick to without feeling constrained in your spending habits.
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Breaking Down the 60-20-20 Rule
The 60-20-20 method is a percentage-based budget. But what is a percentage-based budget?
Basically, it breaks down your after-tax income into percentage categories.
60% of your after-tax monthly income is for basic needs. These range from mortgage or rent payments to health care, car loans, credit cards, and other high-interest debt payments. If it’s crucial for living or a financial obligation, it falls under this category.
20% dedicated to savings— whether it’s sinking funds, bolstering your emergency fund, socking money away in retirement accounts, or other savings goals.
The last 20% caters to non-necessities. This includes anything from a night out, grabbing a quick coffee, or getting your hair colored.
This budgeting method shines in its simplicity. You don’t need to be a spreadsheet whiz on Microsoft Excel or have access to a sophisticated budgeting app to use it.
All you really need is a grasp of your monthly income and an understanding of your spending categories.
Setting Up Your 60-20-20 Budget
Setting up your 60-20-20 budget isn’t complicated at all. Just follow these steps:
- Calculate your take-home pay (after taxes) for the month.
- Break that number down into 60% for necessities, 20% for non-necessities, and 20% for savings.
- Go through your expenses and financial obligations and categorize them accordingly.
Later, we’ll cover what happens if your expenses don’t fit into your 60-20-20 allocation.
Let’s take a look at an example.
Say that you have a take-home salary of $4000 per month. Utilizing this budgeting method that breaks down like this:
- Necessities: $2400
- Savings: $800
- Non Necessities: $800
And it’s as simple as that. You’ve now created a spending plan for your money.
Who the 60-20-20 budget rule may not work for
Some life or financial situations may not work well with this budgeting method. Here are a few of those situations:
- Living in a high-cost-of-living area, If your rent or mortgage payment alone may make this budget setup impractical.
- You have a high debt-to-income ratio. If you have a lot of outstanding debt, those payments may carry you well past 60% of your budget. As those payments are considered financial obligations, they aren’t necessarily something you’d be able to trim aside from simply paying them off.
- Irregular income. Depending on your levels of irregular income, you may find that you need to beef up your savings more than just the 20% in the higher-earning months to prepare for the months when you are earning less.
- Inflexibility in savings priorities. If your financial priorities don’t fit neatly within these predetermined budgeting percentages, this budget rule may not be for you. An example would be someone who is looking to retire early. If you are looking to put 40+% away to speed your path to retirement, this method would not work for you.
- You have a lower income. If you have a lower income, there is a good chance that you will need more than 60% of your paycheck for necessities.
Strategies for Making It Work
What happens when you find that your expenses aren’t lining up well within the framework of the 60-20-20 rule?
You have a couple of options; take a look at where you are over and what expenses they are.
An easy place to start would be to take a more careful eye to those expenses and decide if you have to keep it, whether you should cut it or if it can be lowered.
The expenses that you have to keep would likely be things like your rent or mortgage payment.
Options of things that could be lowered; your cell phone bill, maybe shopping around for new insurance, etc.
Some options for things that you can cut; maybe rotate two meatless meals a week into your rotation or ditch some unused subscriptions.
The point of the exercise is to make adjustments wihthin your expenses until it works.
Bringing It Together
The 60-20-20 budget rule is a budgeting method that is incredibly simple and easy to implement. By categorizing income into clear categories of necessities, savings, and non-necessities, this method not only streamlines budgeting but also fosters a mindset conducive to long-term financial well-being.
Prioritizing savings and providing flexibility in spending, it offers a practical framework for individuals seeking financial freedom.
However, it’s essential to recognize that while the 60-20-20 rule works wonders for many, it may not be a perfect fit for everyone. Factors such as high living costs, substantial debt burdens, irregular income, or differing savings priorities could pose challenges to its implementation.
Yet, even in such cases, there are strategies to adapt and make it work, whether through careful expense management or reassessment of financial priorities.
Ultimately, the beauty of the 60-20-20 rule lies not only in its simplicity but also in its adaptability and ease of use.
