One of the bright spots in this Coronapocalypse is our daughter FaceTiming my husband and me more than usual. One conversation turned to people we knew who’d lost their jobs because of the pandemic and this lead to a discussion of money. She had big questions: Was our savings still intact? Should she keep investing in her 401(k)? If so, how much? How much money does a car cost? Budgeting is very personal. It can also be confusing, tedious, and overwhelming. My husband and I use an 80/10/10 rule (live on 80% of our income, save 10%, give 10%), but there are a ton of theories out there.
Before deciding on which plan was right for us, we needed to know what our income is and what our expenses are. I’ve never met a spreadsheet I didn’t like, so I populated one with all of our expenses. Since we mostly pay with a credit or debit card, they were easy to find; especially the monthly bills. I had to search the record for an entire year because there are expenses we pay annually (e.g., renter’s insurance), and those we pay twice a year (e.g., car insurance). The expenses we paid in cash (e.g., parking), I had to estimate. Then I categorized our expenses according to need (e.g., the utilities are a necessary expense, the Disney+ subscription is not). Having access to this big picture is important because every budgeting theory I’ve researched has a savings component. We usually have to divert money from non-essential expenses in order to save it. Budgeting rules are expressed in percentages instead of dollars so we can scale them as our incomes fluctuate. I’m defining income as the amount on our paychecks, not the amount on our W-2s. After some research, here are the top three budgeting rules I found.
The 70/30 Rule
Invented by Jim Rohn, this plan suggests dividing personal net income into four buckets: 70% to pay living expenses; and 10% each going toward active investing (e.g., a savings account), passive investing (e.g., a 401(k)), and giving (charitable contributions). Pros: It’s easy to remember. Cons: It’s hard to do. Here is a good explanation.
The 70/20/10 Rule
This strategy proposes spending 70% of income on expenses, and setting aside 20% for savings (or debt), and 10% for giving. We should be realistic about paying off debt. I wouldn’t deprive myself of vacations for 30 years to pay off my mortgage, but I did take a part-time job (in addition to my full-time job) to pay off my car. Pros: This works if we have an emergency fund and little debt. Cons: 20% is a lot of income to save. Here is a good explanation.
The 50/20/30 Rule
This approach allocates 50% of income to paying expenses, 20% to debt, savings, or investments; and 30% to things we want (e.g., these can be anything from fast food every Friday to a Nintendo Switch). Pros: It’s a good plan for people new to budgeting. Cons: It’s hard to do when budgeting for a family. Here is a good explanation.
Do you follow a budgeting rule I didn’t highlight? Please share in the comments section.