The 1/3 Rule of Budgeting and How to Use It the Right Way (2024)

Budgeting

August 15, 2023

Breakdown of the 1/3 Rule of Budgeting

The one third rule of budgeting is a financial planning classic. Let’s go over this simple rule of money management in brief, so you can get started budgeting and saving! And scroll down to the bottom to watch my short video about budgeting.

Written By Tiffany Woodfield, Financial Coach, TEP, CRPC®, CIM®

Q: What is the 1/3 rule for budgeting?

The 1/3 rule of budgeting is a simple financial guideline that suggests allocating your after-tax income into three broad categories: home, living expenses, and saving and investments.

The ⅓ rule for budgeting will help you avoid overextending yourself, particularly when looking to purchase a new home or when finding a place to rent. The rule is that a third of your take-home income should be used towards your home, a third for living expenses, and the last third should be for savings and investments.

While using the 1/3 rule of budgeting is not always realistic, depending on where you live, it is crucial to understand that if you overextend yourself, you will end up being stressed and not enjoying where you live, regardless of how great it initially seemed.

It’s important to note that housing costs for renters include rent and utilities; for owners, it includes your mortgage, utilities, property taxes, and homeowner insurance.

The 1/3 Rule of Budgeting and How to Use It the Right Way (1)

Budgeting and Money Mindset

How can I force myself to budget?

It is normal to find it challenging to make a change and start budgeting.

But whenever we “force” ourselves to do anything, we feel bad.

Whenever you say, “I can’t spend on this” or “I have to budget,” you feel deprived. Instead, train yourself to use the critical phrase “I choose.” Feel the difference between saying, “I can’t spend on this,” versus, “I am choosing not to spend on this.”

I bet you can feel the change in your body. When you say, “I choose.” You feel empowered and in control of your destiny. It is the decision of feeling like a victim versus the hero of your own story.

Sticking to a budget as absolutely possible with the right mindset.

The 1/3 Rule of Budgeting and How to Use It the Right Way (2)

Why can’t I stick to a budget?

There are a few main reasons why you can’t stick to a budget:

  1. The budget is too restrictive
  2. You don’t see the rewards of budgeting
  3. Changing habits is difficult
  4. FOMO – Fear of missing out on what your friends and family are doing

This first reason is a more straightforward fix as it is logical, so you need to evaluate your budget and make sure it is realistic.

The other reasons are often more difficult to shift because they are based on your subconscious beliefs.

The practical tools, such as a budget tracker, won’t work to unlock your subconscious roadblocks. You are using the wrong key, so the door will never open.

You need to use a different key.

To work on your subconscious roadblocks, you need to look within to understand your beliefs around money that are holding you back. Manifesting and working on limiting beliefs can be helpful. I wrote an article about how to manifest anything, so check that out. In addition, I recommend reading the article I wrote about how to be rich. While the title might feel confronting, it’s full of information and mindset shifts that will help.

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Why does budgeting give me anxiety?

The word budgeting often gives people anxiety because they instantly feel like they are doing something wrong and need to change.

A budget is like looking in the mirror at your finances: you are making yourself accountable and facing your fear. To counter this, remind yourself that you haven’t done anything wrong, and it is normal to feel this way.

You reduce your anxiety by acknowledging you aren’t in trouble, bad, or frivolous. And by using positive affirmations such as “I am getting control of my finances,” you reduce your anxiety.

Quick Video: 5 Basic Elements of a Budget that Everyone Needs to Know

These five elements of a budget are critical to consider when you’re creating a financial plan that helps you build towards a work-optional lifestyle and financial freedom.

Related Articles on Budgeting

💎 How to Stick to a Budget (Even If You’re New to Budgeting)

💎Budgeting 101: How to Create and Follow a Simple Budget

💎 Three Essential Money Management Rules for Growing Your Wealth

About the Author

The 1/3 Rule of Budgeting and How to Use It the Right Way (4)

TIFFANY WOODFIELDis a financial coach, cross-border expert, and entrepreneur based out of Kelowna, BC. As a TEP and associate portfolio manager, Tiffany has extensive experience working with successful professionals who want to leave a legacy and enjoy an adventurous, work-optional lifestyle. Tiffany combines extensive knowledge from her background as a financial professional with coaching and her passion for personal development to help her clients create a unique path that allows them to live their fullest potential. Tiffany has been a regular contributor to Bloomberg TV and has been interviewed by national and international publications, including the Globe and Mail and Barron’s.

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The 1/3 Rule of Budgeting and How to Use It the Right Way (2024)

FAQs

The 1/3 Rule of Budgeting and How to Use It the Right Way? ›

The rule is that a third of your take-home income should be used towards your home, a third for living expenses, and the last third should be for savings and investments.

What are the three rules of budgeting? ›

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.

What is the rule of 3 spending? ›

For example, in All Your Worth: The Ultimate Lifetime Money Plan, Elizabeth Warren and Amelia Warren Tyagi propose the 50/30/20 budget. This plan suggests that income should be split three ways: 50% on needs, 30% on wants, and 20% on savings.

What is the 1 3 rule in budgeting? ›

The rule is that a third of your take-home income should be used towards your home, a third for living expenses, and the last third should be for savings and investments.

What are the 3 P's of budgeting? ›

Introducing the three P's of budgeting

Think of it more as a way to create a plan to spend your money on things that matter to you. Get started in three easy steps — paycheck, prioritize and plan.

What is the 3 way budget model? ›

What is a 3-way budget? A 3-way budget is a strategic financial plan that aligns three essential financial statements: the P&L, the Balance Sheet, and the Cash Flow Statement. It is typically set once a year.

What are the three 3 major objectives of budgeting? ›

Planning, controlling, and evaluating performance are the three primary goals of budgeting.

What is the 1 3 rule of money? ›

The 1/3 6 3 Rule can be a helpful guideline to follow when managing your personal finances. By allocating 1/3 of your income to housing expenses, 6% to debt repayment, and building a 3-month emergency fund, you can set yourself up for financial success.

What is the 3 rule example? ›

For example, the speech "Non-Violence and Racial Justice" contained a binary opposition made up of the rule of three: "insult, injustice and exploitation", followed a few lines later by "justice, good will, and brotherhood".

What is a good rule of three? ›

The rule of three is a storytelling principle that suggests people better understand concepts, situations, and ideas in groups of three. Over time, the rule has been confirmed by anthropological experts as an archetypal principle that works on three levels: sentences, situations, and stories.

What are the three styles of budgeting? ›

There are three types of government budgets: balanced, surplus, and deficit. A balanced budget ensures economic stability and prevents imprudent expenditures, but it is not suitable for times of economic depression or deflation.

What are the 3 main activities of budgeting? ›

Answer and Explanation: Planning, controlling, and evaluating performance are the three primary goals of budgeting. Planning: Budgeting is a planning tool that enables businesses to establish quantifiable financial targets for the future. They are able to prioritize tasks and allocate resources more wisely as a result.

What is 3 way budgeting? ›

What is a 3-way budget? A 3-way budget is a strategic financial plan that aligns three essential financial statements: the P&L, the Balance Sheet, and the Cash Flow Statement. It is typically set once a year.

What are 3 characteristics of budgeting? ›

What are the most important characteristics of successful budgeting to learn about for the CMA exam? To be successful, a budget must be Well-Planned, Flexible, Realistic, and Clearly Communicated.

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