When it comes to how to do a budget, one size doesn't fit all.
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If you spend some time reading about how to do a budget, you'll likely run across some recommended ratios for how you might allocate your money. These ratios can help in your thinking, but think twice before following them precisely -- one size doesn't fit all.
The 60/10/10/10/10 budget
Zenhabits.com recommends a 60/10/10/10/10 budget.This formula involves spending 60% of your gross income on your regular monthly expenses (rent or mortgage payment, food, utilities, transportation, and even Internet access), 10% on retirement savings, 10% on long-term savings or debt reduction, 10% on short-term savings (for expenses such as gifts and car repairs), and 10% on fun (dinners out, movies, golf, travel, etc.).
The author makes many great suggestions, such as simplifying your financial life by having just a few financial accounts (checking, savings, credit card, etc.) and paying with cash instead of credit cards because paying with plastic often leads us to spend more than we planned or can afford. It is also smart to make a spending category for "fun," which is something that often breaks budgets simply because it wasn't budgeted for.
My beef with this formula for how to do a budget is that it recommends only 10% for retirement savings. That's a common mantra of financial advisors, but the majority of Americans are way behind in their savings and should really sock away more than that. According to the 2014 Retirement Confidence Survey, for example, 60% of American workers have less than $25,000 saved for retirement (excluding the value of their home), and 36% of American workers have less than $1,000 saved for retirement. If you're only a decade or two from retirement and don't have much more than Social Security to count on for retirement income, putting aside 10% of your income may not build a big enough nest egg for you.
Meanwhile, if you have high-interest-rate debt -- for example, from overly enthusiastic credit card use -- you should put much more than 10% toward paying that off if possible. It makes sense to wipe out as much costly debt as possible before putting money toward retirement, too.
The 50/20/30 budget
One formula for how to do a budget that seems more doable for many is the one popularized by Massachusetts Senator Elizabeth Warren and her daughter Amelia Warren Tyagi in their book All Your Worth: The Ultimate Lifetime Money Plan. It recommends allocating roughly 50% of your take-home pay to your needs (such as rent or mortgage payments, food, clothing, insurance, transportation, utilities, etc.), 20% to your savings (this includes debt repayment, retirement, and an emergency fund), and 30% for "wants" such as entertainment, recreation, travel, and even such expenses as haircuts and charity.
This approach does present some challenges, such as its broad categories. It can sometimes be easier to deal with more and narrower categories, as you can then see more easily where your money is going. Some might also take issue with the notion that haircuts and cellphones are considered "wants." But to a great degree, these are discretionary expenses, especially given that we can choose a $15 haircut over a $200 styling and a basic phone over a high-tech smartphone. The Warren plan also deems pet food a want, which might rub some the wrong way, as might her similar categorization of tithing. We all have somewhat different ideas of what we need, and no formulaic plan can decide that for us.
Create your own ratio
Perhaps the greatest value in formulas like the ones above is that they can help you structure the allocation plan that works best for you by giving you some templates to start with and adjust as needed. It matters little whether your charitable giving or pet food is categorized as a "want" or a "need," so long as you account for them when you create your personal budget.
Thinking about how to do a budget means listing all the categories you spend money on and looking at how much income you have and how you can best distribute it. Make sure your budget includes debt repayment and savings for an emergency fund and retirement: Whether or not you're addressing these expenses now, you need to, and a budget can help you do it.
Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter,has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
FAQs
It recommends allocating roughly 50% of your take-home pay to your needs (such as rent or mortgage payments, food, clothing, insurance, transportation, utilities, etc.), 20% to your savings (this includes debt repayment, retirement, and an emergency fund), and 30% for "wants" such as entertainment, recreation, travel, ...
What is the 60 10 10 10 10 rule? ›
60% Solution
In the 60% solution method, you cover all your wants and needs with 60% of your budget. The other 40% is for saving. Then, that 40% gets divided up into three savings categories (10% for retirement, 10% for long-term savings, 10% for short-term savings) with 10% left for “fun.”
What is the 60 20 10 10 rule? ›
Put 60% of your income towards your needs (including debts), 20% towards your wants, and 20% towards your savings. Once you've been able to pay down your debt, consider revising your budget to put that extra 10% towards savings.
What is the 50 30 20 rule of money? ›
The 50/30/20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should be split between savings and debt repayment (20%) and everything else that you might want (30%).
Is the 50/30/20 rule realistic? ›
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.
What is the 1 out of 10 rule? ›
In statistics, the one in ten rule is a rule of thumb for how many predictor parameters can be estimated from data when doing regression analysis (in particular proportional hazards models in survival analysis and logistic regression) while keeping the risk of overfitting and finding spurious correlations low.
What is the 7 out of 10 rule? ›
A 7/10 is attractive or chadlite territory. 7/10s are attractive, but not super attractive. They are attractive enough to be the most attractive person in normal settings.
What is the 70 20 10 budget? ›
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.
How do you do the 70 20 10 rule? ›
The biggest chunk, 70%, goes towards living expenses while 20% goes towards repaying any debt, or to savings if all your debt is covered. The remaining 10% is your 'fun bucket', money set aside for the things you want after your essentials, debt and savings goals are taken care of.
What is the 60-30-10 rule for spending? ›
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.
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 pay yourself first? ›
The "pay yourself first" budgeting method has you put a portion of your paycheck into your retirement, emergency or other goal-based savings account before you spend any of it. When you add to your savings immediately after you get paid, your monthly spending naturally adjusts to what's left.
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.
Is $1000 a month enough to live on after bills? ›
Bottom Line. Living on $1,000 per month is a challenge. From the high costs of housing, transportation and food, plus trying to keep your bills to a minimum, it would be difficult for anyone living alone to make this work. But with some creativity, roommates and strategy, you might be able to pull it off.
Is $4000 a good savings? ›
Ready to talk to an expert? Are you approaching 30? How much money do you have saved? According to CNN Money, someone between the ages of 25 and 30, who makes around $40,000 a year, should have at least $4,000 saved.
What are the flaws of the 50 30 20 rule? ›
Short-term solution - The 50/30/20 budget isn't a long-term way to manage your money, as it puts savings on the back burner, and your needs, wants and interests will change over time.
What is the 10 10 10 70 strategy? ›
This principle says for each dollar you earn or are given, you should save 10%, share 10%, invest 10% and spend 70%. A key part of this formula is “paying yourself first” which means the first 30% of your earnings are paid to you, for your benefit … for your retirement, for emergencies, and for sharing with others.
What is the 10-10-10 rule for decision making? ›
The 10–10–10 rule is a transformative approach that involves examining the potential impact of our decisions over distinct time horizons. When faced with choices, individuals are encouraged to consider the effects of their decisions over the next 10 minutes, 10 months, and 10 years.
What is the 10 10 10 rule in investing? ›
It is a simple rule that answers the following questions. What will be my thoughts 10 minutes later about the decisions that I make now? What will they be ten months later? And what will they be ten years later?
How do you use the 60 30 10 rule? ›
This decorating rule suggests that you should cover your room with 60% of a dominant color, 30% of a secondary color, and 10% of an accent shade. It is all about maintaining the perfect balance of tones. Pick colors that mingle well with each other to create a subtle combo.
