Are you looking for a simple and effective way to manage your finances? The 60 20 20 Budget Rule could be the solution you’ve been searching for. This straightforward method divides your after-tax income into three categories: 60% for needs, 20% for savings, and 20% for wants. By following this rule, you can create a balanced budget that helps you stay on top of essential expenses, grow your savings, and still enjoy a bit of flexibility with non-essential spending.

In this guide, we’ll walk you through everything you need to know to successfully apply the 60 20 20 rule to your financial life.

1. Understanding the 60 20 20 Budget Rule

The rule is a percentage-based budgeting system. This method divides your income into three simple categories:

• 60% goes toward essential expenses like rent, utilities, groceries, and other necessary bills.
• 20% is dedicated to savings, which can include an emergency fund, retirement accounts, or sinking funds for future purchases.
• 20% is for non-essentials or “wants,” like dining out, entertainment, and other discretionary spending.

The simplicity of this method allows you to cover all key areas of financial health: needs, future security, and personal enjoyment. This balance makes it an ideal budgeting choice for those who want to build financial discipline without feeling too restricted.

2. Why the 60 20 20 Rule Works

The effectiveness of the budgeting method lies in its balance between necessities, savings, and enjoyment. Studies have shown that simplicity in budgeting can help people stick to their financial plans longer (Journal of Behavioral Finance). Unlike restrictive budgets, this method allows room for fun, so you’re less likely to give up on it over time.

By focusing a significant portion of your income on necessities, you’re safeguarding your essential expenses. The savings category encourages building a safety net and helps you work toward future goals, while the wants category keeps your lifestyle enjoyable and sustainable.

3. How to Set Up Your Budget

Follow these steps to start using the rule for your finances:

Step 1: Calculate Your Monthly After-Tax Income
This is the amount you take home after all deductions. If you’re self-employed, calculate an average monthly income based on recent months.

Step 2: Divide Your Income into 60/20/20 Percentages
Multiply your income by 0.6, 0.2, and 0.2 to determine how much you should allocate to each category. For example, if you earn $4,000 per month after taxes:

• 60% for Needs: $2,400
• 20% for Savings: $800
• 20% for Wants: $800

Step 3: Categorize Your Expenses
Identify your essential expenses and ensure they fall within the 60% range. This may include rent, utilities, transportation, and groceries. Allocate the other two portions to savings and non-essentials based on your personal priorities.

4. Why This Budgeting Method Works

• Simplicity: By dividing your income into three straightforward categories, it’s easy to understand and manage.
• Flexibility: With 20% allocated for discretionary spending, you won’t feel overly restricted.
• Security: The 20% savings portion helps build an emergency fund and plan for future needs.
• Reduced Decision Fatigue: With predefined spending limits, you can avoid constantly making spending decisions.

5. Practical Tips for Sticking to the Rule

• Use Budgeting Tools: Tools like YNAB, Mint, or Goodbudget can help you track your spending and stay on course.
• Automate Savings: Set up automatic transfers to your savings account to ensure you consistently set aside the 20%.
• Adjust When Necessary: Life changes, so adjust your budget when your income or expenses shift.
• Review and Revise Monthly: Regularly check if you’re sticking to your allocations, and make adjustments if necessary.

6. Additional Tips for Implementing the 60 20 20 Rule

Here are some extra tips to help you stick to and succeed with the 60 20 20 rule:

• Track Your Income and Expenses: Use budgeting tools like Mint or YNAB to monitor your income and expenses closely. Tracking helps you stay aware of your spending patterns and prevents overspending.
• Prioritize High-Interest Debt: If you have debt with high interest, such as credit card debt, focus on paying this off as part of your essential expenses. High-interest debt can weigh heavily on your finances, so paying it down early can save you a lot on interest.
• Automate Savings: Setting up automatic transfers to your savings and investment accounts can make saving effortless. Consider platforms like Qapital or Digit for automated savings.
• Review and Adjust: Regularly review your budget and make adjustments as needed to stay on track. Life changes, and so should your budget—if your income or expenses shift, be ready to adapt.
• Consider Financial Advice: If you’re facing a complex financial situation or have specific goals, consulting with a financial advisor can help. They can offer personalized guidance and help you craft a long-term financial plan based on your needs.

For those interested in more aggressive savings strategies, you may also want to explore our article on How to Save Half Your Income for practical hacks toward financial freedom and early retirement.

7. Who the budgeting Rule Might Not Work For

While the 60 20 20 rule works for many people, it may not suit everyone, especially those who:

• Live in High-Cost Areas: If rent alone takes up more than 60%, you may need a more flexible budget.
• Have Significant Debt: Those with high-interest debts might need a budget focusing more on debt repayment.
• Face Irregular Income: Freelancers or those with inconsistent income may find a percentage-based approach challenging and may need a flexible monthly budget.

8. Tools and Resources to Help You Implement the 60 20 20 Rule

To make this budgeting rule easier, try these tools:

• Mint: Offers budgeting and expense tracking to help categorize spending.
• YNAB (You Need A Budget): Great for those who want to learn budgeting fundamentals and get more control over their money.
• Qapital: Helps automate savings with customizable rules.
• Digit: Automatically sets aside money based on your spending habits, making savings feel effortless.

9. Conclusion: Achieve Financial Balance with the 60 20 20 Rule

The Budget Rule is a powerful tool for those looking to simplify their finances and establish a balanced approach to budgeting. By committing to this rule, you’ll allocate your resources effectively, covering both essential expenses and future needs while still allowing for enjoyment and flexibility in your lifestyle.

Whether you’re new to budgeting or just looking for a fresh approach, the 60 20 20 rule could be the game-changer you need. Start today, and experience the peace of mind that comes from having a balanced, easy-to-follow financial plan.