Are You Tired Of Restrictive Budgets You Can’t Stick To?

If you answered yes, then it might be time to try something different. Budgets based on deprivation and willpower typically aren’t sustainable since our brains aren’t wired that way. It’s like being on a diet and having to give up bagels and ice cream - forever. You’re setting yourself up for failure.

It might be time to take a look at something easier. The 60/20/20 approach to budgeting is a variation of the popular 50/30/20 budgeting method, with a few slight modifications. This method involves dividing your after-tax income into three categories: 60% for necessities, 20% for financial goals, and 20% for flexible spending. That’s it.

Here are the steps to follow when using the 60/20/20 approach:

1.     Determine your after-tax income: Calculate your monthly after-tax income, which is the amount you take home after all taxes and deductions have been taken out.

2.     Allocate 60% of your income to necessities: Necessities include housing, utilities, food, transportation, and other expenses that are essential for daily living.  Remember to include expenses that are non-monthly like license renewal, car inspections, HOA payments, tax preparation fees, and car and house maintenance. 

3.     Allocate 20% of your income to necessary financial goals: This category includes things like funding your emergency fund, retirement, and extra payments toward debt. 

4.     Allocate 20% of your income to flexible spending: This category includes discretionary spending on “wants” vs “needs”.  Divide the 20% into 10% for goals such as home projects, home décor, landscaping, buying a house, having a baby, car replacement, and vacations, and 10% for monthly spending on things like entertainment, eating out, shopping, hobbies, and whatever else you like to spend money on.  This 10% is your monthly “guilt-free” spending.  But once it’s gone, it’s gone.

5.     Review your percentages: Once you have allocated your income into the three categories, you may find that you are overspending in one area.  For example, if you are finding that you don’t have 10% for long-term discretionary spending so a vacation is out of reach, you will need to find a way to cut back on your necessary expenses by paying off debt faster, selling an expensive car, reducing your spending on other discretionary expenses like eating out, or bringing in more income by changing jobs, asking for a raise, or working part-time nights and/or weekends. You may find that you have to work toward 60/20/20 if you are not there yet. Just make that a goal.

The 60/20/20 approach to budgeting is a great way to prioritize your spending and ensure that you are putting enough into savings and debt repayment. By allocating a larger portion of your income to necessities, you can reduce the stress of living paycheck to paycheck and ensure that you are able to meet your financial obligations. Additionally, by allocating 20% of your income to flexible spending, you can enjoy some discretionary spending without feeling guilty or sacrificing your long-term financial goals.