OK, so you know that a budget can help you reign in your spending and achieve your savings goals–but what percentage should go where?
Today, I’ll explain how the 60/30/10 rule budget works.
What is the 60/30/10 Rule Budget?
The 60/30/10 budget rule is a percentage-based budgeting strategy that follows this breakdown:
- 60% should be saved or invested
- 30% should be for essentials like housing and food
- 10% should be for discretionary spending like subscriptions or travel
Who should use the 60/30/10 rule budget?
With most conventional investing advice will suggest allocating around 15% of your income to investments, 60% is clearly an ambitious allocation.
Therefore, the 60/30/10 rule budget is best for people who want to:
- get on the fast track to building wealth
- retire early
- save for a major purchase like a house
- or any combination of the above
If you have big goals and the discipline to match, the 60/30/10 rule budget could work for you.
Benefits of the 60/30/10 Rule Budget
The 60/30/10 rule can help you pay off debts and build wealth quickly. Thanks to the effect of compound interest, saving large quantities of your income early on can help you build wealth at an accelerated rate.
It’s simple. If you are the type of person who gets overwhelmed by complexity, this budget is relatively simple and straightforward.
It forces you to consider your values. Unless you are an exceptionally high earner (we’re talking multiple six-figures) or you’re in a location with a very low cost of living, this budget type will likely force you to make some sacrifices. However, going cold turkey on extraneous expenses usually leads to the realization that a lot of the purchases you made pre-budget were not all that necessary.
Does the 60/30/10 rule budget actually work?
Any percentage-based budget can be effective as long as you set realistic targets and are disciplined in sticking to the budget. However, I will say, most people will find the 60/30/10 budget challenging, especially those in high cost of living areas
I’m personally a huge fan of values-based budgeting, which is a philosophy that’s focused on spending on things you love.
How to Put Together the 60/30/10 Rule Budget
It’s important to make sure your budget is properly structured to ensure its effectiveness. Here are the steps:
1. Establish your monthly income
Let’s say you make $80,000 per year and after taxes, your annual take home pay is $60,000. This puts your monthly budget at $5,000.
(Note: It’s important to use after-tax income. If you are a freelancer, be sure to subtract the amount that you anticipate to pay in taxes.)
2. Determine how much money will go to each category
With a $5,000 monthly income, your 60/30/10 rule budget will look like this:
$5,000 x 60%: $3,000 toward saving/investments
$5,000 x 30%: $1,500 for needs
$5,000 x 10%: $500 for discretionary spending
3. Assign each expense to a category
Next, you’ll need to list out all of your expenses and assign them to a bucket: essentials or discretionary spending. Here are some basic guidelines for categorization:
Essentials:
- Rent
- Utilities
- Transportation
- Groceries
Discretionary spending:
- Eating out
- Travel
- Non-essential clothing purchases
- Subscriptions
During this exercise, consider which expenses can be eliminated.
Sometimes an expense doesn’t need to be cut out completely, just downgraded. For example, do you do groceries at a premium store like Whole Foods? While this expense might be considered a “need”, you can probably cut down your grocery bill by going to the local chain store instead.
If you find that after cutting out unnecessary expenses you’re still overloaded in a particular category, you’re probably better off finding ways to increase your income.
4. Adjust as necessary
Now that you’ve created your budget–stick to it! After the first month, see if you need to make any adjustments.
If you find that you’re consistently making adjustments month to month, this is an indication that you haven’t set realistic targets.
How does the 60/30/10 rule compare with other budget types?
There are several other popular percentage-based budgets. I’ll quickly break down how they compare with the 60/30/10 rule:
70-20-10 rule
- 70%: Essentials
- 20%: Savings/Investments
- 10%: Debts
This model allocated significantly more to basic expenses and also makes room for any debts like student loans or medical debt.
I will say that this allocation is more realistic for the majority of people in higher cost of living areas.
50-30-20 rule
- 50%: Essentials
- 30%: Discretionary Spending
- 20%: Debts
I explain in this post why I’m not the biggest fan of the 50/30/20 rule.
Final thoughts
If you’re considering the 60/30/10 budget, you’ll definitely need discipline! For those who are truly determined to make it work, the long-term benefits of this strategy will make the short-term sacrifices worthwhile.
If you are ready to start investing, whether its 60% or $25, here is how to get started.
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