Optimize your spending, increase your savings, and achieve your financial goals by using the game-changing 60 20 20 rule of budgeting. It is a simple yet powerful strategy which can simplify the overwhelming process of budgeting.
This rule of budgeting has transformed the lives of thousands of people. If you also want to take maximum advantage of it, keep reading.
Understanding The 60-20-20 Rule
The 60-20-20 rule is not rocket science to be understood. There are three different numbers that simply guide you about the percentage-wise allocation of your after-tax income.
This rule suggests 60% of your income should go to essentials, 20% should go towards financial matters and 20% will go towards your wants.
|60||60% of your income goes to essentials like rent, food, electricity etc.|
|20||20% of your income goes to financial matters like debt repayment and savings etc.|
|20||20% of your income goes to wants such as shoes, movies, eating out etc.|
Advantages of This Rule
The 60-20-20 rule has several effective advantages. Such as:
1. Easy to follow
This rule is simple and very easy to follow for everyone & an accessible budgeting strategy for those who are looking to improve their financial health.
2. Provides Flexibility
When you already allocate your income into three different buckets, it gives you the flexibility to decide how much you should spend and how much to save. You don’t need to worry about overspending on discretionary items.
3. Helps In Reducing Debt
By allocating one of the three buckets towards debt repayment, this rule helps individuals to pay off their debts faster and reduce financial stress.
4. Encourages Savings
This rule suggests allocating 20% of the income towards savings and debt repayments. This way it encourages savings.
As soon as you build an emergency fund through these savings, you can then start building your wealth by investing or you can also plan your retirement.
5. Brings Financial Stability
The 60-20-20 rule can help individuals achieve financial stability by preallocation of income towards necessities, savings, and discretionary spending in a balanced way.
How To Implement This Rule Successfully
You should follow some steps to implement this rule successfully. These steps are:
- First, you need to calculate your monthly income which is the amount you get after tax and other deductions.
- After you calculated your monthly income, allocate 60% of it towards necessities, 20% towards savings and debt repayments and the remaining 20% towards discretionary spending.
- Create a budget plan based on these categories and include all your monthly expenses.
- Use a budgeting app or spreadsheet to keep track of your expenses and ensure you are staying within your budget. You can make adjustments if needed.
Common Mistakes to Avoid When Using 60 20 20 Rule
- Ignoring Emergency Funds: If you do not build an emergency fund, you could end up breaking your budgeting plan. Hence, it is advised to build an emergency fund as soon as possible.
- Overcomplicating Budget: Keep your budget as much simple as you can. Overcomplicating your budget can prevent your budget strategy work effectively.
- Not Tracking Your Expenses: One of the most significant mistakes in budgeting is not tracking expenses. Without tracking your expenses, you won’t be able to stick to your budget and end up disrupting your budgeting strategy.
- Failing to Adjust Your Budget: Your monthly income and expenses can change from month to month. Not adjusting accordingly can lead you to overspend in one category and underspend in another. This mistake, again, can affect your financial goals.