What Is The 60-20-20 Rule And How Does It Work?


Budgeting is an important tool that lets you guide where you want to spend your money. But it can sometimes be overwhelming because there are so many different ways to budget. That said, the 60-20-20 rule is a simple budget you can follow to help you save more and spend less.

This article will help you understand what the rule is, how to use it, and if it's right for you. We'll also go over common alternative budgets to consider.

What is the 60-20-20 rule?

The 60-20-20 method is a percentage-based budget. That means each number in the rule stands for a portion of your income:

  • 60% of income goes to expenses
  • 20% of income goes to savings
  • 20% of income goes to wants

Like other percentage-based budgets, the 60-20-20 system is easy to set up and follow. You can use tools like direct deposit and automatic savings transfer to help you automatically budget using the 60-20-20 method.

Benefits of the 60-20-20 budget

Using the 60-20-20 rule can help you better understand where your money goes each month. In turn, this gives you the power to make changes in your spending or saving habits.

This can be a big benefit to your overall financial situation.

Other benefits of the 60-20-20 method include:

Flexible spending

You choose how to allocate funds within each category.

Easy to implement

A quick look at your monthly income and expenses is all you need to start.

Makes saving a priority

Dedicating 20% of your income to savings means you’re prioritizing savings goals.

How does this technique work?

The 60-20-20 system breaks down your monthly income into three spending categories. You can use the money in each category to pay for a range of products, services, or savings goals.

That said. let’s break down the categories to get a better idea of what items fall into each:

60% to living expenses

This category includes necessary expenses, including rent or mortgage payments, utilities, groceries, and insurance costs.

20% to savings

Your savings category could include an emergency fund, retirement savings, or education savings for your children.

20% to non-necessities

Funds in the remaining 20% of your income can be used for whatever you want, such as dining out, shopping, or a dream vacation.

When creating a 60-20-20 budget, you’ll want to use your net pay over your gross pay. Net pay is your after-tax, take-home pay. It’s what you actually see in your direct deposit or paycheck.

Using your after-tax pay to make a budget is essential, so you don’t accidentally over-estimate your monthly funds.

For example, your gross (pre-tax) pay is $4,000. After taxes and deductions—like health insurance or 401(k) contributions—your net pay is $3,000.

That $1,000 difference could break your budget and leave you feeling discouraged about budgeting, so you should always budget using your take-home pay.

How to make a 60-20-20 budget

Creating a 60-20-20 system is straightforward, but it will take a little bit of work. There are a few steps:

  1. Add up your total monthly income and divide it into 60%, 20%, and 20%.
  2. List out all of your monthly expenses.
  3. Separate your expenses into three categories: necessities, savings, and non-necessities.
  4. Add up each expense category and compare it to your divided monthly income.
  5. Make adjustments as needed to fit your expenses into the 60-20-20 categories. For example, cutting down on dining out to keep unnecessary spending down.

60-20-20 rule example

The easiest way to understand the 60-20-20 method is to use an example.

Let’s say your monthly take-home income is $3,000. So break down your income into 60%, 20%, and 20%:

  • 60% to living expenses is $1,800
  • 20% to savings is $600
  • 20% to non-necessities is $600

Next, list out your monthly expenses, savings goals, and spending habits. Add up how much you spend in each category. If your categories fall within the amount above, you’re already sticking to a 60-20-20 system.

However, what if you’re spending too much or too little in a specific category?

In this example, say you currently spend $2,000 on living expenses, $200 on savings, and $800 on unnecessary purchases. You’ll need to rework how you spend your money to increase the amount you save while decreasing your spending.

For example, you manage to cut your non-necessity spending by reducing shopping trips and entertainment costs.

To reduce your living expenses, you can use coupons and inexpensive meal ideas when buying groceries. You can also cut energy costs by being more efficient with your electricity usage.

Who should use the 60-20-20 rule?

Some people are uneasy about budgeting because they think budgets are about denial. In reality, a budget is simply a plan to help you manage your money. That makes the flexibility of the 60-20-20 rule a big benefit for new budgeters.

Instead of planning out every dollar, you’ll be able to spend as you want within the limits of each category.

For example, one month, you might go on vacation and spend a significant portion of your 20% wants on one trip. The next month, you spend the 20% slowly on small gifts or treats for yourself, like a massage or new shoes.

Who the 60-20-20 rule may not work for

However, the 60-20-20 method won’t fit everyone’s lifestyle or financial situation. Three situations where you might consider a different budget include:

You have a lower income

If you make a lower income, you might need more than 60% of your paycheck for living expenses.

The cost of living in your area is high

You could need more than 60% of your income for expenses if you live in a place with a high cost of living.

You have a lot of debt

Spending 20% of your income on non-necessities might not be the best idea if you have a lot of debt.

How to make a 60-20-20 budget work for you

If you’re not sure if the 60-20-20 rule will work for you, the best thing to do is give it a try. You can always forget the idea if it doesn’t fit your financial situation.

Consider creating a 60-20-20 system based on your current income and spending. This is a good way to see if you can tweak your current spending habits to fit the system.

If so, try using your 60-20-20 budget for at least two months. Because this gives you enough time to really see if the budget is sustainable.

It’s okay to try a different budgeting method if the 60-20-20 method doesn’t work for you. The ultimate goal of a budget is to get you to think before you spend. You may have to try several methods to find one that works best for you.

Tips for successful budgeting

Starting a budget might feel intimidating. Luckily, there are a few budgeting best practices you can follow. Try these tips to get the most out of your budget:

  • Be clear about your money goals.
  • Calculate the average cost of variable expenses, such as credit cards or utility bills.
  • Adjust your budget when life changes, like marriage or a new job.
  • Re-visit your budget regularly. This helps you make sure it’s still working for your situation.

Alternative budgets to try

The 60-20-20 system isn’t the only budget you can use. It’s far from the only percentage-based budget out there!

As you know, budgets are supposed to be flexible. So that means if one method doesn’t work, you can simply try a different one.

When should you try a different budgeting technique?

There are lots of reasons you may need to adjust your budget.

For example, you just got married. You now have two incomes to use when budgeting.

You’ll also have changes in your expenses, such as higher grocery or fuel costs. And of course, your partner might have different spending and saving habits than you.

Down the road, you and your partner decide to have children. There are many added expenses with the arrival of a child. You’ll likely need to redo your budget to account for diapers, baby food, and healthcare costs.

Another time to try a different budget is when changing jobs. Let’s say you get a promotion at work—and a big salary increase. Your new salary means you only need 40% of your paycheck for living expenses, rather than 60%.

6 Alternative budgets to the 60-20-20 method

Percentage-based budgets like the 60-20-20 method are some of the most popular budgeting options. They’re easy to start and give you lots of spending flexibility.

Take a look at some common alternatives to the 60-20-20 rule.

50-30-20 budget

The 50-30-20 budget divides your take-home income into three categories. You’ll put 50% of your paycheck into needs, 30% into wants, and 20% into savings.

You may want to try this method if your savings are on track with your goals. With more money going toward non-necessities, it’s important to have enough savings before trying this method.

Zero-sum method

A zero-based budget is a common method that doesn’t break your income into portions. Instead, this method allocates all of your money into categories.

For example, you make $2,000 a month. You divvy this number between categories until it’s zero, such as:

  • $800 for rent
  • $500 for car payment and insurance
  • $200 for fuel
  • $200 for groceries
  • $100 for savings
  • $100 for wants
  • $100 for utilities

The zero-sum budget is great if you struggle with the flexibility of the 60-20-20 method. In the zero-based method, you know exactly where each dollar goes.

70-20-10 budget

Do you feel confident in your money management skills? The 70-20-10 budget could be right for you. This budget gives you quite a bit of flexibility in how you spend your money.

Using the 70-20-10 budget, you’ll divide your money into portions with:

  • 70% going toward spending
  • 20% going toward saving
  • 10% going toward giving (including charity donations, wedding or birthday gifts, and paying off debt)

You can spend the 70% portion on whatever you like—from rent and car insurance to dining out or vacations. With nearly unlimited flexibility, this method is ideal for someone with responsible spending habits.

60-30-10 rule

The 60-30-10 budget is a method for aggressive savers. Using this budget, you don’t focus on paying living expenses first. Instead, you’ll pay yourself first by filling your savings with 60% of your income.

The 30% portion of your take-home pay goes to your needs. Meanwhile, the final 10% of your income is for discretionary spending.

While the 60-30-10 rule is aggressive, it’s a great method if you have lofty financial goals. For example, you might use this budget if you want to retire early.

30-30-30-10 rule

Unlike other rules, the 30-30-30-10 budget breaks down your spending into more categories.

With this method, you’ll spend 30% of your income on housing costs. The next 30% goes toward other necessities like utilities or groceries.

Then, you’ll put 30% toward paying off debt or savings. The final 10% is your discretionary budget for wants.

This budgeting method is often a good choice if you’re shopping for a new home. By separating your housing costs, you get a better idea of how much home you can afford.

80/20 budgeting rule

Does budgeting still feel overwhelming? Enter the 80/20 rule.

This simple rule is great for budgeting beginners. It simply splits your monthly income into two categories:

  • 80% goes to needs and wants
  • 20% goes to savings

The 80-20 rule is often recommended as a starting point because it prioritizes savings without overwhelming the budgeter.

You won’t need to remember a million different spending categories to use this budget. Instead, your biggest focus is putting 20% of your income into savings.

Give the 60-20-20 rule a try!

Whether you choose the 60-20-20 method or a different percentage-based budget, it's a great tool for allocating your money. These systems help you make sure your bills are paid in full each month.

They can also help you see if you’re overspending in certain categories, such as spending too much on non-necessities.

The 60-20-20 technique is simple to calculate, so it’s an easy way to get started budgeting. Go ahead and try it out today! You might also like our articles about getting paid monthly and how to make a budget calendar.

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