Budgeting requires discipline, but that doesn’t mean you can’t make space for some of your favorite life pleasures. If you’re prone to spending a little (or a lot) more than you should on yourself, this strategy may be right for you.
The 60/20/20 budget allocates your monthly after-tax income into 3 basic buckets:
- 60% Necessities
- 20% Savings
- 20% Personal
While the 60/20/20 budget system is similar to other basic budgeting strategies, it differs in the spending allocated to your personal needs (20%). This strategy can be helpful when working to cut down on personal expenses (from 30% of monthly spend or more).
Additionally, you might find this strategy helps you learn to enjoy saving for financial goals more. Read on to find out why.
Is the 60/20/20 Budget Right for Me?
Not far down the line from the 50/30/20 budget strategy, the 60/20/20 budget resembles it’s brother-budget in all but the percentage breakdown. Instead of spending 30% of your monthly after-tax income on yourself, you’ll take 10% and allocate to your necessities instead.
For example, divide out your monthly after-tax (or take home) income into three categories (60%, 20%, 20%). We’ll call these categories buckets. Bucket 1) your necessities. Bucket 2) your savings. Bucket 3) your personal spending. Let’s imagine this budget with a monthly after-tax income of $3000.
Monthly after-tax income: $3,000
Calculate 60% of your monthly after-tax income:
$3,000 x .60 (1 = 100%, so .6 is 60%) = $1,800.
Next, calculate 20% of your monthly after-tax income:
$3,000 x .2 (1 = 100%, so .2 is 20%) = $600
Your 60/20/20 budget breakdown would look like this:
60% Necessities: $1,800
20% Savings: $600
20% Personal: $600
Different monthly after-tax income? Here’s a table of a few other take-home pay examples.
| Monthly After-Tax Income | 60% Necessities | 20% Savings | 20% Personal |
| $1,000 | $600 | $200 | $200 |
| $2,000 | $1,200 | $400 | $400 |
| $2,500 | $1,500 | $500 | $500 |
| $3,000 | $1,800 | $600 | $600 |
| $5,000 | $3,000 | $1,000 | $1,000 |
| $6,000 | $3,600 | $1,200 | $1,200 |
| $7,500 | $4,500 | $1,500 | $1,500 |
| $10,000 | $6,000 | $2,000 | $2,000 |
60% Necessities – Pay For Yourself
The major bucket of your budget goes to life’s necessities. This 60% includes all of the things you need to take care of yourself. That includes your major monthly expenses: housing, food, and transportation. It should also include your utilities, insurance, phone/internet, etc.
The benefit to having a large bucket to meet your needs means that where you save in one area, you’ll have more to spend in the other.
For example, let’s imagine your 60% bucket was divided into 3 smaller buckets.
- Housing – 30%
- Food/transportation – 20%
- Everything else – 10%
If we carry forward our initial $3,000 monthly after-tax income example, that’d look like this:
$3,000 x .60 (1 = 100%, so .6 is 60%) = $1,800.
60% Necessities: $1,800
$3,000 x .30 (.3 = 30%) = $900
$3,000 x .20 (.2 = 20%) = $600
$3,0000 x .10 (.1 = 10%) = $300
($900 + $600 + $300 = $1,800, or 60% of your monthly after-tax income)
This example budget puts food and transportation costs of $600/month and housing at $900/month. Let’s assume you work in the city, but live outside of it. Doing so means you commute to work (higher transportation costs), but can afford cheaper living outside of the city. Say that you found a good apartment to rent near your work right downtown. It’s $1,200/month. Should you move?
Well, if you were able to cut down on food or transportation by $300/month then you’re still meeting your 60% necessities budget target. Having a place where you can walk to work might not only save on transportation costs, but can also give you valuable time back in your day. In this scenario, you can make the move.
Remember that 60% is your bucket. The benefit to percentage based budgeting means you have the flexibility to craft the lifestyle that works best for you without breaking the bank.
20% Savings – Pay Yourself
Another benefit to the 60/20/20 budget is fewer categories, or buckets. The second bucket being your financial savings. The beauty here is that you’re intentionally carving out a percentage of your budget for financial goals. Your 60% bucket allows you to pay for yourself. This next 20% is how to pay yourself.
Paying yourself means preparing for your financial future. Money that you save today is money that can start working for your future. By saving and investing responsibly, you’re creating space in your monthly budget to allow your money to start working for you.
If you have no debt, you can begin investing 20% of your monthly after-tax salary each month. At $600 a month (20% carried down from our initial example), you’d be investing $7,200 each year. If you invested the same amount each year for 5 years, with a 7% estimated rate of return, you’d have contributed $36,100 with an additional $8,344 in interest! In 10 years, that’d be $106,639. And in 35 years $1,066,045!
Got a big ticket item like a wedding or house you’re saving up for? Begin saving today so that when the time comes, you and your finances will be ready.
20% Personal – Spend On Yourself
This last 20% is yours for the spending. It’s easiest to classify this bucket for your ‘wants’ (as opposed to your needs – the 60%). From our initial example, that’d be $600/month. This is where you can save up for a fun trip, catch a night out with friends, take your family to the movies – whatever. Use this bucket to support ongoing wants as well – things like subscription or streaming services.
If you’re used to spending on yourself first, the 60/20/20 budget can help you curb your appetite so to speak. Focus on your needs and your savings first. That’s where you need to start. If you’re experienced with the 50/20/30 budget, you’re used to spending a bit more on yourself. By cutting down that 10% you may be able to find that you’re just as happy – if not happier – spending less on yourself and more on the major expenses of your budget. Doing so might lead to greater comfort and satisfaction (a nicer living space or healthier food for example) and can teach you to focus on quality essentials instead of quantity nonessentials. You can even use psychology to understand how to spend money on yourself more effectively.
Linking your Saving and your Spending
Now, one last benefit of the 60/20/20 budget worth mentioning is the psychological link you’re creating between your savings (20%) and your spending (20% personal). With this budget, you’re allocating 20% toward these two buckets. Doing so has the potential to create a link between the enjoyment you get spending on yourself and your savings. Over time, you’ll begin to associate the amount you’re saving with the amount you’re spending. As you find enjoyment on that 20% personal spend, you’ll begin to enjoy that other 20% spending bucket as well. Because in reality, the entire 40% is being spent on you. You’re just segmenting the payout to your current (personal bucket) and your future (savings bucket) self.
If you’ve had trouble saving for yourself in the past, the 60/20/20 budget may be a good strategy to help you find enjoyment in learning to pay for your future self.
Conclusion
As always, stay disciplined and stay on track! The journey is a climb up your financial mountain, with checkpoints, setbacks, and steep inclines at certain points. You may not be perfect right off the bat, and that’s okay. Keep at it until you find the system that’s right for you. Explore other budgeting options if this doesn’t stick. Soon enough, you’ll be on your way to mastering your finances.
The most important part is to begin.
Climb on, FinBase.
J
