Budgeting is planning your finances to live a stress-free life. The purpose of a good budget is to get the most out of your finances so that you can win your financial game. But sometimes budgeting may leave no money in your hand to actually enjoy your life. To have some money left in your hand to enjoy your life and do the things you want to do, you can follow the 60 20 20 Budget rule. This rule ensures that some money is actually left in your hand to enjoy. If you want to implement this budget rule in your life then you should read further to get a complete understanding of this.
The 60 20 20 Budget Rule
This rule mainly divides your total income in the ratio of 60:20:20. It says that you should spend your total income in the following manner:
60% towards necessities
The 60 20 20 budget rule says that you should allocate 60% (sixty percent) of your total income for expenses which are essential for your living. The example of such expenses can be groceries, rent, etc. These are basically the expenses which are spent on your necessities. These expenses are of repetitive nature and every month you will incur such expenses. Items like food, rent, insurance form the basic and substantial part of your living.
20% towards financial expenses
The 60 20 20 budget rule says that you should allocate the next 20% (twenty percent) of your total income for financial matters. This includes paying off your debts or investing the money somewhere or savings. You should first use this 20% for payment of debts if you have any. After paying off your debts, if you still have any money left then you can either save it and/or invest it somewhere.
20% towards non-essential items
The 60 20 20 budget rule says that you should allocate the remaining 20% (twenty percent) of your income for purchasing non-essential items. These items are not your needs but these are your wants. This means that if you donât spend on these items, it wonât affect your day to day life. These items add on to your comfort and make our life luxurious. An example of this is spending on eating at restaurants or buying clothes, shoes, etc. This is also called discretionary spending because it is at the discretion of the earner how they want to spend it. It is found that most people spend their major chunk of income on this. In order to maintain a good balance, you must spend 20% or less of your total income on non-essential items.
Tips to get started
By now I am sure that you have understood what does this rule implies. The most common question that comes to mind is how to get started with it. So, first and foremost, you need to jot down your income and expenses on paper. Subsequently, categorize your expenses in the above categories. For example, say your income is $5000 per month. So, 60% of $5000 is $3000. You must check that your total living expenses are $3000 or less than that or more than that. Next, you have $1500 i.e., 20% of $5000 for spending on financial matters and $1500 for spending on non-essential things. So, now you need to see whether you are spending more than $1500 on non-essential items. If that is the case then you should lower down your spending on those items.
It is to be noted that living expenses are the crucial expense and it may exceed 60% of your total income. You canât lower down your living expenses at once because it comprises all the basic necessities of life and you cant cut down any basic necessity at once. So, even if it goes up to 65%, it is still a good budget. You can make your budget template as 65:20:15. Clearly, it is not necessary to follow this template rigidly. As per your situation, you might modify it a bit.
The present generation is more interested in living a luxurious life and therefore, they end up spending a major chunk of their income on luxurious things. This results in an increase in their debts. To avoid such a problem, a good budget is required. Undoubtedly, the 60 20 20 budget rule is a great budgeting idea to follow as it allocates your total income in a fair ratio. Moreover, you even get 20% of your total income to spend on luxury or for having fun. Apply this rule in the present to have a better future.