A key question when budgeting is how much of your income you should be stashing away in savings. But when you start to get into the numbers, it’s not uncommon to find there is a gap between how much it is recommended you save and how much you can actually save after all of your expenses.
This reality, intensified by persistent inflation, is why the 60/30/10 budgeting method has been rising in popularity. The ratios offer a little more room for expenses by putting a little less toward savings than the longstanding gold standard, the 50/30/20 budget.
What is the 60/30/10 budgeting method?
The 60/30/10 budgeting method breaks down your monthly income into three categories: 60% of your income will go toward essential expenses (think housing, food and transportation), 30% will go toward discretionary expenses (like going out to eat and streaming services) and the remaining 10% goes into savings or toward paying down high-interest debt.
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This budgeting framework differs from the go-to 50/30/20 budget in one major way, which is how much it allocates to savings. With the 50/30/20 rule, you put only 50% toward essential expenses, instead allocating 20% to savings and debt pay-off.
How does it stack up against the classic 50/30/20 budget?
The truth is, “many individuals may find that 50% of their income just isn’t enough to cover all necessary expenses,” said Kiplinger. For people feeling strapped by steep costs, the 60/30/10 budget can offer a more forgiving framework to follow.
Some experts worry, however, that the reduced rate of savings and debt pay-off could end up hampering long-term financial progress. Setting aside 10% instead of 20% can translate to “slower progress on savings and debt repayment, which may leave you carrying high-interest balances longer,” said NerdWallet. It may also make it challenging to, say, save enough for retirement or a down payment on a home.
The reallocation from savings to essentials could sidestep addressing root problems, too. For example, if “high rent is driving costs, downsizing or relocating might be a better solution than raising your ‘needs’ to 60%,” said NerdWallet.
How can you determine the right budgeting ratio for you?
Ultimately, the “exact ratios someone should use are flexible and many people find that they need to shape it to their needs,” said Stephen Kates, a certified financial planner and the principal financial analyst for Annuity.org, to U.S. News & World Report.
The 60/30/10 budget may work well for “young adults who have higher ‘startup’ costs like a first apartment, buying a car, moving to a new city for a job, student loan repayments, etc.” said NerdWallet. On the other hand, “older individuals may want to prioritize savings over spending, leading them to trim down the 30% allocation on discretionary spending and save more for retirement,” said Kiplinger.
Whichever ratio you land on, keep in mind that it does not have to be a permanent choice. As your financial situation evolves, so, too, should your saving habits.
