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When it comes to personal finance, there is no ‘one size fits all’ solution. Each solution must be tailored to each individual case. Same applies to budgeting. Although there are many ways to set up a budget, there are two ways to build a budget that works. First one is the ‘slow and steady’ where you are already in a good financial position and tracking to your plan. The second one is ‘bootstrapping’ where you really want to attack your debt and grow wealth quickly.
Each rule guides how much of your income should be allocated to each category to help you achieve financial balance. ‘Slow and steady’ follows the split 50-30-20 and ‘bootstrapping’ follows the 60-30-10 split. Here’s how each rule is broken down:
Slow and steady budget rule 50-30-20:
- 50% is allocated to necessities and bills that must be paid, such as housing, utilities, debt repayments.
- 30% is allocated to discretionary spending, such as going out or purchasing a new phone.
- 20% is allocated to savings, such as retirement plan investments, stock purchases.
Bootstrapping rule 60-30-10:
- 60% is allocated to savings and debt repayment
- 30% is allocated to necessities and bills that must be paid, such as housing, utilities, insurance, etc.
- 10% is allocated to discretionary spending, such as going out or purchasing a new phone.
They are more similar than they are different. The main difference between the two rules is that ‘bootstrapping’ or 60-30-10 prioritizes saving and debt repayment. This rule is meant to be more temporary, such as getting out of debt or catching up on your retirement savings. Once the target goal is reach then you can transition to ‘slow and steady’ or 50-30-20 which relaxes the purse strings and is more sustainable. However, the ‘bootstrapping’ rule has been adopted by the FIRE (financial independence, retire early) community on a long term basis rather than temporary. By adopting this rule, individuals and couples alike have been able to retire years, and some even decades, earlier than planned.
Putting it into practice
- Figure out your take-home income, and make a list of all of your expenses.
- Assess your situation in order to pick which rule to follow. Do you have a large debt that needs to be paid off? Is your nest egg far from where you want it to be? If you have some ground to make up then you will likely have to go with rule 60-30-10. Otherwise, 50-30-20 is a good place to start.
- Assess your spending against the rule’s parameters and make some impactful decisions that will bring you as close as possible to the required parameters.
- Follow your new budget and assess your progress monthly.
Bottom line
The purpose of setting a budget is to create a healthy habit of evaluating your expenses and understanding how each expense impacts your financial goals. Assess your progress regularly (once or twice a month is sufficient). As you evaluate your wealth growth each month you will be motivated to keep going. Success breeds success!