The 60-20-20 budgeting rule is a financial management rule is simple and easy to understand. It works like this: spend 20% of your income on necessities, save the other 80%, and then spend the remaining 20% on non-essential things. Although it is not a perfect number, it’s one that is widely accepted among financial experts. The 60-20-20 rule has been used in financial planning and budgeting for years and has been promoted as the “gold standard” for budgets. But it’s not perfect. So what are some of the disadvantages of this rule? Here are the things you should know about it.
It’s All About Priorities
The 60-20-20 rule is an easy way to determine how you should manage your money, but the numbers don’t tell it all. They don’t tell you how much you need to save in order to ensure that you can afford any new purchases or what percentage of your income should go toward debt repayment. You need to take into account your specific financial situation and make adjustments accordingly.
It Doesn’t Account for Inflation
The rule assumes that everything will cost the same in the future as it does today, but that isn’t always true. A gallon of milk today costs $3.50 while a gallon of milk 10 years ago only cost $1.05. This rule doesn’t account for inflation, which means that your 20% savings might not have the same purchasing power as it did when you first started following the rule.
It’s Not Ideal for Everyone
The budgeting rule is a good place to start, but it doesn’t take into account your specific needs and goals or your individual personality traits. If you are someone who likes to splurge on toys and luxury items, the 20% allotted for non-essentials might not be large enough to cover them all .
It’s Not Perfect
The 60-20-20 rule is a balanced budget account. However, the numbers don’t take into account the costs of living. According to financial planner Mary Beth Stahl, retirees can expect to spend approximately 20% of their after-tax income on basic necessities and another 20% on discretionary items. But that doesn’t include insurance and retirement expenses, which can be upwards of 10% of income before retirement savings are factored in.
The 60-20-20 rule works best for someone who is young, healthy and financially sound. If you do not fall into these categories, you may need to adjust your budget to fit your specific situation instead of blindly following the numbers on the paper.
