Budgeting Rule: The 50/20/30 and 60/20/20 Budget
4 min read
In this article we talk about budgeting and two different ways of budgeting: the 50/20/30 Budget and 60/20/20 Budget. We look at what they are and what your income looks like when split this. Finally, we discuss how budgeting helps you achieve your financial goals sooner.
Before you jump in and implement any budgeting rule or changes to your budget, we’d suggest having a look at what you’re currently spending and making a note of whether they’re needs/essentials, wants or likes. If you’re not sure where your money is going, there’s a lot of different apps you can use (like ASIC’s TrackMySpend) that can help you with this information or you can get an app that syncs in directly with your bank account (or maybe you already have you bank app on your phone which provides this).
Once you know what you’re spending, you have the opportunity to make some changes. We’d suggest going back three months to get a good snapshot of your recent spending activity and capture quarterly things like utilities.
Both of the budgets outlined below are based on a percentage of your income going towards certain things, they don’t necessarily take into consideration your actual current spending – rather the suggestion is that you should adjust your spending and expenses to fit in line with ratios outlined.
The 50/20/30 Budgeting Rule
The break down for this budget is 50% on living expenses, 20% on achieving financial goals and 30% on wants or discretionary spending. This budget was created by Harvard Professor and bankruptcy expert Elizabeth Warren.
- 50% of your take home income is spent on living expenses includes – things like rent/mortgage, groceries, utilities and transportation.
- 20% of your take home income is put into achieving your financial goals – such as debt reduction, savings and investments.
- 30% of your take home income is on discretionary spending – this might include entertainment, travel and eating out.
The 60/20/20 Budgeting Rule
This is a budgeting rule outlined by the Barefoot Investor Scott Pape. You’ll have to buy his book for the full system, but for a good overview check out The Barefoot Budget here.
Scott suggests 60% of your income on essentials, 20% on your financial goals, and 20% on wants or discretionary spending. These numbers aren’t set in stone, if you spend less on essentials and more on savings then that’s fine. In his recent book he amended this split to 60% on living expenses, 20% on achieving financial goals, 10% on savings and 10% on wants or discretionary spending.
The breakdown for the 60/20/20 budget looks like:
- 60% of your income is on living expenses – rent/mortgage, groceries, utilities and transportation
- 20% of your income on financial goals – debt reduction, emergency fund and investments
- 20% of your income on discretionary spending – entertainment, travel and eating out
The higher your income is, the less we find these two budgets make sense, only for the fact that your living expenses are not necessarily going to be 50-60% of your income if you’re earning $10,000,000 per year. Likewise, if you’re earning $25,000 a year you might not be spending 30% of your income on discretionary spending, you might spend more of it on essentials.
They’re a great place to start if you’ve never budgeted before and have no interest in tracking every single dollar you earn – you can quite easily set up some automations in your bank based on the figures you calculated above.