I love the concept of automation, and I think we should apply it to our personal finances wherever sensible:
- Betterment automatically prepares me for retirement.
- My credit card pays itself off automatically every month. As long as the “check” doesn’t bounce, I’ll never pay a late fee or credit card interest again in my life.
- My mortgage, student loan payment, insurances, utilities and other monthly bills come out of my checking account on their own. I send no paper checks – so I don’t have to remember them.
But automation only gets you so far – which is my main beef with “60/40″ or “80/20″ budgeting plans. The idea is that you’ll save 20% or 40% of your income off the top, allowing to do whatever you want with the remaining 60% or 80% of your income.
Yes – I see real wisdom in automatically saving such a big percentage of your income. Following this plan for a few decades could set you up for a great retirement.
The problem is most people aren’t immediately in a position to save such a high percentage. We’d have to work to increase our savings rate over time.
And how do you increase your savings rate? By minding each dollar and planning carefully. In other words, by using a real budget.
Using a budget isn’t an exercise in restriction or deprivation; it’s an opportunity to raise your awareness about where your dollars flow. As you increase awareness, you’ll get more life-value from each dollar.
60/40 and 80/20 budgeting plans sound great, but the advice seems impractical to me. If you flip the concept on its head, you’re telling people “go ahead and ignore 60% to 80% of your finances, and everything will work out fine.” It just doesn’t sit well.
But, hey, I realize you might not like the idea of a traditional budget. Here’s a little secret – the right kind of budget doesn’t tell you not to spend – it tells you to spend every last penny on your current and future expenses.
Want even more of the best money stories around?
Our newsletters are full of YNAB wisdom and inspiration!
Sign Up
FAQs
Save 20% of your income and spend the remaining 80% on everything else. 60/40. Allocate 60% of your income for fixed expenses like your rent or mortgage and 40% for variable expenses like groceries, entertainment and travel.
What is the 80 20 budget method? ›
YOUR BUDGET
The 80/20 budget is a simpler version of it. Using the 80/20 budgeting method, 80% of your income goes toward monthly expenses and spending, while the other 20% goes toward savings and investments. Of course, the 80/20 budget rule won't work for everyone.
Which category of a 50 30 20 budget do you think transportation expenses fall into why? ›
With the 50-30-20 budget, you assign all of your household income to one of three main categories of expenses: Needs — The 50-30-20 approach dictates that you devote 50% of your income to this category. Needs are things like housing, utilities, food, clothing, insurance, and transportation.
What is the 50 25 25 rule? ›
Invest 50% of your salary for your future. Set aside 25% for taxes. Spend the remaining 25%
Is 80/20 better than 60/40? ›
Which Mix Is Right for You? If you're a younger investor with a long time horizon and are comfortable taking on more risk, the 80/20 portfolio may be a good fit. However, if you're closer to retirement or prefer a more conservative approach, the 60/40 portfolio may be a better option.
What is the 60 20 20 rule? ›
If you have a large amount of debt that you need to pay off, you can modify your percentage-based budget and follow the 60/20/20 rule. Put 60% of your income towards your needs (including debts), 20% towards your wants, and 20% towards your savings.
What is the 80-20 rule also known as? ›
The 80-20 rule, also known as the Pareto Principle, used mostly in business and economics, states that 80% of outcomes results from 20% of causes.
What is the 80-20 rule called? ›
The Pareto principle, also known as the 80/20 rule, is a theory maintaining that 80 percent of the output from a given situation or system is determined by 20 percent of the input. The principle doesn't stipulate that all situations will demonstrate that precise ratio – it refers to a typical distribution.
What is 80-20 rule examples? ›
80% of your success comes from 20% of your ideas. 80% of the public uses 20% of their computers' features. 80% of crimes are committed by 20% of criminals. 80% of sales are from 20% of clients.
What is the 50 20 30 rule broken down? ›
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
The 50/30/20 rule can be a good budgeting method for some, but it may not work for your unique monthly expenses. Depending on your income and where you live, earmarking 50% of your income for your needs may not be enough.
Why is the 50/30/20 rule bad? ›
Some Experts Say the 50/30/20 Is Not a Good Rule at All. “This budget is restrictive and does not take into consideration your values, lifestyle and money goals. For example, 50% for needs is not enough for those in high-cost-of-living areas.
What is the 25x rule? ›
If you want to be sure you're saving enough for retirement, the 25x rule can help. This rule of thumb says investors should have saved 25 times their planned annual expenses by the time they retire, according to brokerage Charles Schwab.
How to do 50 30 20 rule biweekly? ›
What Is the 50/30/20 Rule?
- 50% for your needs. Half of your income should go toward essentials or necessities, such as housing (including mortgage or rent), groceries, transportation, health insurance, and the minimum payment on your debts, such as student loans.
- 30% for your wants. ...
- 20% for your savings.
The 50/30/20 rule is a budgeting technique that involves dividing your money into three primary categories based on your after-tax income (i.e., your take-home pay): 50% to needs, 30% to wants and 20% to savings and debt payments.
What is the 60 rule for budgeting? ›
The 60/30/10 budgeting method says you should put 60% of your monthly income toward your needs, 30% towards your wants and 10% towards your savings. It's trending as an alternative to the longer-standing 50/30/20 method.
What is the 60 40 rule in business? ›
But, the most successful entrepreneurs practice the 60/40 rule in every interaction. The rule is simple — in any conversation, as the person who is conceptualizing, developing, selling or optimizing an idea, you should listen at least 60% of the time; and talk no more than 40% of the time.
What is the 70/20/10 rule in finance? ›
The 70-20-10 budget formula divides your after-tax income into three buckets: 70% for living expenses, 20% for savings and debt, and 10% for additional savings and donations. By allocating your available income into these three distinct categories, you can better manage your money on a daily basis.
