Budgeting is the cornerstone of personal finance, helping you track spending, save, and reach financial goals. While traditional budgeting methods like the 50-30-20 rule are popular, the 60-20-20 budget provides a more straightforward and practical approach for people with higher fixed expenses or specific financial priorities. In this blog, we’ll break down the 60-20-20 budgeting method, explain how to use it effectively, and show how it can help you take control of your money.
What Is the 60-20-20 Budget?
The 60-20-20 budget divides your after-tax income into three main categories:
- 60% for Necessities: This covers essential living expenses, including housing, food, utilities, transportation, and insurance.
- 20% for Savings and Debt Repayment: This portion is dedicated to building savings, investing, or paying down debt.
- 20% for Discretionary Spending: This covers non-essential expenses, such as dining out, entertainment, shopping, and hobbies.
This budget is ideal for individuals with high fixed costs or those who want to emphasize savings and discretionary spending equally.
Step-by-Step Guide to Using the 60-20-20 Budget
1. Calculate Your After-Tax Income
Before dividing your income, determine your take-home pay.
- Include all sources of income, such as salary, side hustles, or rental income.
- Subtract taxes, health insurance premiums, and retirement contributions deducted at the source.
Your after-tax income forms the foundation of your budget.
2. Allocate 60% for Necessities
Necessities are your must-have expenses that ensure your basic needs are met.
Examples of Necessities:
- Rent or mortgage payments
- Utility bills (electricity, water, gas)
- Groceries
- Transportation (car payments, fuel, public transit)
- Insurance (health, home, auto)
Tips to Stay Within 60%:
- Avoid renting or buying a home that exceeds 30% of your income.
- Reduce utility bills by conserving energy.
- Shop smart for groceries by using coupons or buying in bulk.
If your necessities exceed 60%, identify areas to cut back or consider increasing your income to balance the budget.
3. Dedicate 20% to Savings and Debt Repayment
This category focuses on building financial security and paying off high-interest debt.
Savings Goals to Consider:
- Emergency fund (3–6 months of living expenses)
- Retirement savings (401(k), IRA, or other investment accounts)
- Long-term goals (buying a home, starting a business)
Debt Repayment Priorities:
- Pay off high-interest credit card debt first.
- Tackle student loans, car loans, or mortgages strategically.
Tips to Maximize Savings:
- Automate savings transfers to a dedicated account.
- Consider the snowball or avalanche method for debt repayment.
- Take advantage of employer retirement contribution matches if available.
4. Use 20% for Discretionary Spending
Discretionary spending is what you use for personal enjoyment and lifestyle upgrades.
Examples of Discretionary Expenses:
- Dining out or takeout
- Vacations and travel
- Subscriptions (Netflix, Spotify, gym memberships)
- Hobbies and entertainment
- Shopping for clothes, gadgets, or gifts
Tips to Manage Discretionary Spending:
- Prioritize experiences or purchases that truly add value to your life.
- Set spending limits for non-essentials to avoid overspending.
- Use budgeting apps to track and categorize expenses easily.
Discretionary spending is meant to be enjoyed, but it’s crucial to avoid exceeding the allocated 20%.
Advantages of the 60-20-20 Budget
1. Simple and Flexible
This budget is easy to implement and adjust based on individual needs.
2. Emphasizes Essentials and Savings
With 60% allocated for necessities, it suits individuals with higher fixed costs, such as families or those living in urban areas.
3. Balances Fun and Financial Goals
The equal split between savings and discretionary spending ensures financial security without sacrificing enjoyment.
Is the 60-20-20 Budget Right for You?
This budgeting method works best for:
- Individuals with high living costs, such as rent or mortgage.
- People who value simplicity in their budgeting approach.
- Those who want a balanced focus on saving and discretionary spending.
If your necessities consistently exceed 60%, you might need to adjust the ratios or explore alternative budgeting methods, such as the 50-30-20 rule.
Tips for Sticking to the 60-20-20 Budget
- Track Your Spending: Use budgeting apps like Mint or YNAB to monitor and adjust your expenses.
- Automate Savings: Set up automatic contributions to savings or investment accounts to avoid the temptation to spend.
- Review Regularly: Check your budget monthly or quarterly to ensure you’re on track and adapt to life changes.
- Cut Unnecessary Expenses: Review subscriptions or memberships and cancel what you no longer use.
- Stay Disciplined: Stick to your discretionary spending limit and avoid dipping into savings for non-essentials.
Conclusion
The 60-20-20 budget is a practical and adaptable framework that helps you manage your money effectively while balancing needs, savings, and lifestyle expenses. By prioritizing necessities, building financial security, and allowing room for enjoyment, this budgeting method empowers you to take control of your finances and work toward your financial goals. Start implementing the 60-20-20 budget today, and watch your financial confidence grow!
