As inflation strains an increased number of household budgets, many financial advisers are finding that the 60/30/10 budgeting method is a better fit for many households than the long-standing 50/30/20 budgeting model.
The 50/30/20 rule, created by U.S. Senator Elizabeth Warren in her book All Your Worth: The Ultimate Lifetime Money Plan, has been a gold standard for budgeting since 2006. The method advises individuals to allocate 50% of their income towards necessities, 30% towards “wants” and 20% towards savings and paying down debt. However, many individuals may find that 50% of their income just isn’t enough to cover all necessary expenses. This is why the new model can work better for a growing number of individuals who spend a higher portion of their monthly income on necessities.
For example, the number of cost-burdened (when a household has a cost ratio of over 30%) renter-occupied households was 20.1 million in 2021, according to the U.S. Census Bureau. That marks an increase of around 1 million households since 2019. Additionally, the number of severely cost-burdened households (when a household has a cost ratio of over 50%) was 10.4 million in 2021, up from 9.4 million in 2019.
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Andrew Harris, managing director at Jenius Bank tells Kiplinger: "The 60/30/10 budgeting method is a flexible alternative to the traditional 50/30/20 rule, which may be a better option for many consumers in today’s inflated economy. With half of Americans paying more than 30% of their income on housing (let alone additional necessities), they must reevaluate their financial priorities and adapt their budgets for the current times."
Average American household budget
The most recent Consumer Expenditure Survey from the U.S. Bureau of Labor Statistics provides the average annual expenditures per household spending category in 2022. Here's a look at several of those categories.
- Average household income: $94,003
- Total household spending: $72,967
- Food: $9,343
- Housing: $24,298
- Transportation: $12,295
- Healthcare: $5,850
- Entertainment: $3,458
Overall, the largest annual expenditures go toward housing, using up almost 26% of a household's pay. Transportation uses up around 13% and food almost 10%.
And even though inflation has cooled from its peak in 2022, prices of many goods and services still remain elevated, eating up a big chunk of the average American's household budget. This is why an alternative method of budgeting can be a better option for many households.
How does the 60/30/10 budgeting method work?
When using the 60/30/10, you’ll allocate 60% of your monthly income towards essential expenses, such as gas, utilities, groceries and rent. You'll designate 30% of your income for discretionary spending, such as shopping or dining out, and the final 10% is either put in savings or used to pay off high-interest debt.
This method of spending is particularly well-suited for younger individuals who have more time to save for long-term goals, as well as those who live in high-cost cities like New York or Los Angeles, shares Harris. And while this method doesn't allocate as much money towards savings as the 50/30/20 model does, a savings category is still essential to any budget.
"It’s widely recommended that consumers put away 15% of their pre-tax earnings for retirement, so the 10% goal isn’t far off from the recommended amount, Harris tells Kiplinger. "The 60/30/10 rule may be suitable for all consumers depending on their individual goals and situations but may appeal more to younger generations who can adjust their contributions as their income increases. Though saving may fall lower on the list of priorities for young people, the benefits of compounding, in savings accounts as well as investments, could pay off later."
However, while using the 60/30/10 can be a great starting point for budgeting, Harris advises individuals to tailor their budget towards their unique financial situation and priorities. For example, older individuals may want to prioritize savings over spending, leading them to trim down the 30% allocation on discretionary spending and save more for retirement. Once you establish a budget that works for you, it's important to regularly revisit it to ensure it aligns with your actual spending, current savings goals and any major life changes.
"In your financial wellness journey, it's crucial to identify the values and priorities that will guide your money decisions moving forward," says Harris. "Utilize these values to establish and prioritize financial goals, breaking them into manageable steps incorporated into your budget, savings plan and investment strategies. Understanding how your priorities align with your goals may foster greater intentionality in your daily financial decisions."
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FAQs
What is a 60/30/10 budget? The numbers in the 60/30/10 each represent a percentage of your financial plan. With this system, you will use 60% of your take-home pay to build your savings or even an early retirement account, invest, save up for a down payment, or repay debt. Next, you will spend 30% on your needs.
What is the new 60 30 10 budget? ›
When using the 60/30/10, you'll allocate 60% of your monthly income towards essential expenses, such as gas, utilities, groceries and rent. You'll designate 30% of your income for discretionary spending, such as shopping or dining out, and the final 10% is either put in savings or used to pay off high-interest debt.
What is the 70/20/10 rule money? ›
It indicates an expandable section or menu, or sometimes previous / next navigation options. It's an approach to budgeting that encourages setting aside 70% of your take-home pay for living expenses and discretionary purchases, 20% for savings and investments, and 10% for debt repayment or donations.
What is the 60 20 20 rule for budgeting? ›
Put 60% of your income towards your needs (including debts), 20% towards your wants, and 20% towards your savings.
What is the new 50 30 20 budget? ›
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. Let's take a closer look at each category.
What is an example of 60 30 10? ›
An example of the 60-30-10 rule in interior design is a living room with 60% of the space featuring a soft beige as the primary color, 30% incorporating a deep navy blue as the secondary color, and 10% of the room showcasing a bold coral as the accent color.
What is a 5 15 50 budget? ›
50 - Consider allocating no more than 50 percent of take-home pay to essential expenses. 15 - Try to save 15 percent of pretax income (including employer contributions) for retirement. 5 - Save for the unexpected by keeping 5 percent of take-home pay in short-term savings for unplanned expenses.
What is the 40 40 20 budget? ›
The 40/40/20 rule comes in during the saving phase of his wealth creation formula. Cardone says that from your gross income, 40% should be set aside for taxes, 40% should be saved, and you should live off of the remaining 20%.
What is better than the 50/30/20 rule? ›
Alternatives to the 50/30/20 budget method
For example, like the 50/30/20 rule, the 70/20/10 rule also divides your after-tax income into three categories but differently: 70% for monthly spending (including necessities), 20% for savings and for 10% donations and debt repayment above the minimums.
What is a 70 15 15 budget? ›
70/15/15 Budget
With this budget rule, you'll spend 70% on needs, 15% on wants, and 15% on savings. This could work well for a family that has a lower income with a high cost of living.
The 80/20 rule breaks out putting 20% of your income toward savings (paying yourself) and 80% toward everything else. Once you've adjusted to that 20% or a number you're comfortable with saving, set up automatic payments to ensure you stick to it.
What is one negative thing about the 50 30 20 rule of budgeting? ›
And the 50/30/20 budget might not be suitable for those with limited funds who are living paycheck to paycheck. For instance, a family of four with a low household income may not be able to save the full 20% after paying essential bills, Dr. Lee said. And that's okay, 50/30/20 budget is customizable.
How much do I need to save a month to get $10,000? ›
To reach $10,000 in one year, you'll need to save $833.33 each month. To break it down even further, you'll need to save $192.31 each week or $27.40 every day. These smaller chunks are much more realistic and simple to comprehend, making it easier to track your progress.
What is the best time to start saving for retirement? ›
The answer is simple: as soon as you can. Ideally, you'd start saving in your 20s, when you first leave school and begin earning paychecks. That's because the sooner you begin saving, the more time your money has to grow.
What are the four walls? ›
In a series of tweets, Ramsey suggested budgeting for food, utilities, shelter and transportation — in that specific order. “I call these budget categories the 'Four Walls. ' Focus on taking care of these FIRST, and in this specific order… especially if you're going through a tough financial season,” the tweet read.
What is the alternative to the 50 30 20 rule? ›
Alternatives to the 50/30/20 budget method
For example, like the 50/30/20 rule, the 70/20/10 rule also divides your after-tax income into three categories but differently: 70% for monthly spending (including necessities), 20% for savings and for 10% donations and debt repayment above the minimums.
Is the 50/30/20 rule realistic? ›
Is the 50/30/20 rule realistic? The 50/30/20 budget rule might not be realistic for those dealing with economic challenges——which, let's face it, is pretty common in today's climate of high inflation and living costs. “It's unrealistic for most people,” Musson says.
What is 60 40 budget plan? ›
In the 60% solution method, you cover all your wants and needs with 60% of your budget. The other 40% is for saving.
What is the 10 savings rule? ›
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. Experts warn that putting just 10% of your income into savings may not be enough.
