The 60/30/10 budgeting method has been gaining popularity lately, but is it a wise approach?
Jenny Groberg, the founder and CEO of BookSmarts Accounting and Bookkeeping, said in an email that she finds the trend concerning.
While it may help you today, it could put your future at risk. Here’s a closer look at why.
What Is the 60/30/10 Budgeting Method?
The 60/30/10 budgeting method involves allotting 60% of your monthly income toward your needs, 30% toward your wants and 10% toward your savings.
The format may look familiar as it follows the same structure as the long-standing 50/30/20 budgeting method. However, the key difference is it moves 10% from the “savings” bucket to the “needs” bucket.
[Related:Wants vs. Needs In Your Budget — How to Tell the Difference]
“People may be unable to use the 50/30/20 budget right now because their needs are more than 50% of their income,” Kendall Meade, a certified financial planner at SoFi, said in an email.
While that can be OK for a period, she urges people to try and get close to the 50/30/20 framework over time. “That 10% may not be enough to achieve your goals like retirement, down payments, etc.,” she said.
Groberg gave a similar warning. “This trend concerns me because people will never be able to save for homes, for retirement, for unforeseen medical or other emergent problems,” she said.
Why Are Americans Saving Less?
Rising costs have put pressure on the budgets of American households, leaving many looking for ways to make ends meet.
[READ: How to Create a Saving Strategy]
“Housing is as unaffordable as it has ever been and while rental prices are easing relative to buying, it is still challenging for many Americans. The 20% cumulative inflation since 2020 is hard to ignore regardless of how your income may have changed,” Stephen Kates, a certified financial planner and the principal financial analyst for Annuity.org, said in an email.
Meade added that debt is also likely playing a role. “Credit card interest rates are now above 20%, on average,” she said. If you can only afford to make your minimum payments, your balances could go up even if you’re not making new purchases, she said.
[READ: How to Create a Saving Strategy]
What Budgeting Ratio Is Right For You?
The right budgeting ratio for you will depend on your situation.
“Ultimately, the exact ratios someone should use are flexible and many people find that they need to shape it to their needs,” Kates said. He explains that parents, for example, may not be able to afford the same ratios as couples with no children.
However, if you find yourself in a position where your household’s needs require more of your budget than your current ratio allows, Kates says you don’t want to pull exclusively from your savings bucket.
“Cutting savings without discretionary spending means sacrificing your future for today. If a client came to me and asked about moving from 50/30/20 to 60/25/15, I wouldn’t fight them on it. But moving to a 60/30/10 is skewing priorities,” Kates said.
[Read: How to Make a Budget — and Stick to It.]
Looking Beyond Budgeting Methods
In addition to adjusting your budgeting method, it can help to go through your expenses with a fine-tooth comb.
“Many finance ‘gurus’ beat people up for their wasteful coffee or dining habits but realistically that is not going to make or break your long-term plans. Transportation and housing are the critical items in your financial life,” Meade said.
She explained that if your housing and car payments are too high, you won’t have enough money to adequately save or invest.
“I recommend trying to keep your total debt payments around 36% (of your income) to give you room in your budget for savings/ investments. This includes car payments, housing, student loans and any other debt payments such as credit cards,” Meade said.
So, if you make $6,000 per month, your total debt payments should be $2,160 per month or less — this is known as your debt-to-income ratio.
If your debt-to-income ratio is currently higher than 36%, you can look into options like consolidating or refinancing debt, buying a cheaper car or moving to a lower-cost city.
“I see far too many people buy an expensive car and realize a year down the road that this is causing them to fall behind on their other goals like retirement savings,” Meade said.
She added that while you don’t want to completely overdo the small expenses like coffee or going out to eat, it’s important to keep room in your budget for some of your indulgences.
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Is the 60/30/10 Budget Rule Replacing the 50/30/20? Experts Hope Not originally appeared on usnews.com
