How the 60/40 and the 80/20 Budget Methods Fall Short


I love the concept of automation, and I think we should apply it to our personal finances wherever sensible:

  • Betterment automatically prepares me for retirement.
  • My credit card pays itself off automatically every month. As long as the “check” doesn’t bounce, I’ll never pay a late fee or credit card interest again in my life.
  • My mortgage, student loan payment, insurances, utilities and other monthly bills come out of my checking account on their own. I send no paper checks – so I don’t have to remember them.

But automation only gets you so far – which is my main beef with “60/40″ or “80/20″ budgeting plans. The idea is that you’ll save 20% or 40% of your income off the top, allowing to do whatever you want with the remaining 60% or 80% of your income.

Yes – I see real wisdom in automatically saving such a big percentage of your income. Following this plan for a few decades could set you up for a great retirement.

The problem is most people aren’t immediately in a position to save such a high percentage. We’d have to work to increase our savings rate over time.

And how do you increase your savings rate? By minding each dollar and planning carefully. In other words, by using a real budget.

Using a budget isn’t an exercise in restriction or deprivation; it’s an opportunity to raise your awareness about where your dollars flow. As you increase awareness, you’ll get more life-value from each dollar.

60/40 and 80/20 budgeting plans sound great, but the advice seems impractical to me. If you flip the concept on its head, you’re telling people “go ahead and ignore 60% to 80% of your finances, and everything will work out fine.” It just doesn’t sit well.

But, hey, I realize you might not like the idea of a traditional budget. Here’s a little secret – the right kind of budget doesn’t tell you not to spend – it tells you to spend every last penny on your current and future expenses.