Budgeting Rules

What is the 80/20 rule?

This rule states that 20 % of your income should go to savings/investments, while the other 80 % goes to needs and wants

Example of using this budget rule:

John has an annual payment 50,000 dollars. He doesn't know how to balance his spending and saving, so he tries the 80/20 method that his friends have been talking about.

20 % of 50,000 dollars, or 0.2 times 50,000, is 10,000 dollars. This money of his will be used for saving for retirement/unforeseen expenses

80 % of 50,000 dollars or 0.8 times 50,000, is 40,000 dollars. This money of his will be used for spending on needs and wants.

What is the 50/30/20 Rule?

Example of using this budget rule:

This rule states that 50 % of your paycheck will go to your needs (food, water, toiletries, medicine), 30 % will go to your wants (video games, vacation, designer clothing, entertainment), and once again, 20 % will go to your savings
This rule is a variation of the 80/20 rule, but is a little stricter. It splits the 80 % of your take-home pay (of the 80/20 rule) into 50 % dedicated to needs, and 30 % dedicated to wants

Eddie currently uses the 80/20 budget rule, but wants a more rigid and fixed rule that will allocate the massive 80 % of spending into needs and wants. This is because he does not have a good balance between spending on needs and spending on wants. He has an annual payment of 75,000 dollars.

20 % of 75,000 dollars, or 0.2 times 75,000, is 15,000 dollars. This amount will be used for saving

30 % of 75,000 dollars, or 0.3 times 75,000, is 22,500 dollars. This money will purely be dedicated for wants

50 % of 75,000 dollars, or 0.5 times 75,000, is 37,500 dollars. This money will be dedicated to needs.

What is the 70/20/10 Rule?

This rule states that 70 % of your income will be devoted to wants and needs
The 20 % of your take-home pay will be committed to savings and investments
The 10 % will be dedicated to debt-repayments (credit-card debt, car loan payments, etc)
This budget rule explains how much money should go to debt management

Example of using this budget rule:

Sam has tried the 80/20 and the 50/30/20 budget rules. However, she wants a basic understanding of how much money she should use to pay off debt. She also realizes that 50 % of her budget is not enough to cover her needs. So, she tries the 70/20/10 budget rule. She currently has an income payment of 60,000 dollars.

10 % of 60,000, 6,000 dollars, will go to debt repayments and donations

20 % of 60,000 dollars, is 12,000 dollars, which will be devoted to saving and investing

70 % of 60,000 dollars, or 42,000 dollars will be committed to spending on needs and wants

What is the 40/30/20/10 Rule?

This rule states that 40 % of your income payment will be devoted to savings
The 30 % of your income pay will be committed to needs
The 20 % of your income pay will be dedicated to wants
The 10 % of your income pay will be devoted to donation/charity

Example of using this budget rule:

Elliot wants to be 100 % financially secure in her life. She spends less of her money on needs and wants, and instead, prioritizes saving money in the long-run. So, she tries the 40/30/20/10 budget rule. She currently has an annual payment of 100,000 dollars.

10 % of 100,000 dollars, or 10,000 dollars will go to charity

40 % of 100,000 dollars, or 40,000 dollars will purely be dedicated towards savings

20 % of 100,000 dollars, or 20,000 dollars will be committed to discretionary spending (wants) in life

30 % of 100,000 dollars, or 30,000 dollars be devoted towards needs in life

Pros and Cons of each Budget Rule

80/20 Budget Rule

Pro: This rule is extremely flexible, as you can pretty much decide what to spend 80 % of your income on. It is an easy proportion to work with for beginners, that allows them to prioritize savings.
Con: At the same time, this rule is too flexible. It does not explain how much money should be devoted to needs and the amount of money that should be devoted to wants.

50/30/20 Budget Rule

Pro: This rule is one of-if not the most popular budget rule. This rule allows those who use it to prioritize saving money for unforeseen expenses, and is a good, straightforward budget rule for beginners.
Con: This rule can stimulate reckless spending on wants, and may not allocate enough money towards needs, especially for low-income families.

70/20/10 Budget Rule

Pro: This rule is good for those who devote a lot of their money to spending over investing. It is also beneficial for those who are financially stable, and have room for donation/charity.
Con: This rule does not separate the 70 % into two smaller percentages for needs and wants.

40/30/20/10 Budget Rule

Pro: This rule places a lot of emphasis on saving money, and is good for less materialistic people who don't care for many possessions.
Con: This rule can be difficult to use for people who prioritize needs over saving money, and is unrealistic for those new to budgets.

Which one is meant for you?

Whichever one satisfies your needs!
It depends what you value, and how much money you start off with; as a beginner, you may want to go with a safer option, like the 50/30/20 rule.

Important Takeaways

It's important to understand that these budget rules are flexible and can be altered to facilitate your needs and preferences.
These foundational rules can be modified around YOUR needs, so don't feel like you need to be bound to one of these; they are just simple budget rules that can be used!
Just because I used large numbers as average adult salaries, these budget rules can apply to teens too. Even if you are a referee, per se, and make 50 dollars per game, you can still use these proportions as a foundation to organize your own budget.