Why a 60/30/10 Budget Could Be the New 50/30/20

A money-management formula introduced nearly 20 years ago by Elizabeth Warren still has relevance, financial planners say—with a few tweaks. 

Back in 2006, Warren—now a Democratic Senator from Massachusetts, then a Harvard Law School professor—popularized the 50/30/20 rule, detailed in the book All Your Worth: The Ultimate Lifetime Money Plan, which Warren co-wrote with her daughter, Amelia Warren Tyagi.

In this model, half of your income goes towards “needs” including your rent or mortgage, utilities, car payment and so on. An additional 30% goes towards “wants”—that is, discretionary purchases like vacation flights or “upgraded” expenses, such as springing for the ad-free streaming package. The remaining 20% is for socking away in an emergency fund or retirement account, or to pay down high-interest debt such as credit card balances. 

It sounds great in theory, but in an economy where housing costs alone can easily consume half a paycheck—particularly for young adults earning entry-level income—it can feel difficult, if not flat-out impossible.

Financial advisers say molding this budget advice to today’s economy means embracing a certain degree of flexibility. 

“It’s important to have rules of thumb and structures that can help guide us and get things organized, but there aren't any rules that are written in stone, and that's important to know—that it's never a concrete situation. It’s important to be flexible,” says Kevin L. Matthews II, founder of the financial education firm BuildingBread.

Read More: 8 Reasons Your Credit Card Was Declined (And What To Do About It)

“For someone making good money in a reasonable cost of living area, that rule works fine,” says Elizabeth Pennington, a senior associate at the financial planning firm Fearless Finance. “Where it breaks is for most of my clients living in high cost-of-living areas.” 

For this reason, Pennington says she encourages clients to embrace the idea of the 50/30/20 formula without applying it as a mandate. “A rule of thumb is meant to be an entry into the conversation and less an end-all, be-all of what we're trying to achieve,” she says. 

According to Moody’s Analytics, while incomes have climbed by 77% since 1999, rents have soared by 129%. Nationwide, average rents equal 30% of median income, and young adults in particular are feeling the financial squeeze of high housing costs. Survey results published in November 2022 by mortgage agency Freddie Mac found that about a third of adults age 25 and younger say they don’t ever expect to be able to afford to own a home.

Read More: Is It Finally Time to Buy a House?

If you still have decades ahead of you to save for retirement, it’s OK to cut yourself some slack on the 20% part of the model. If you’re a young adult, “60/30/10 is just fine,” says Michael Finke, professor of wealth management at the American College of Financial Services. “Then you can gradually, as you reach middle age, increase that savings rate.”

“If you're taking someone that’s just starting or living paycheck-to-paycheck, it can be unrealistic or overly drastic, especially as they're beginning to really get a handle on their finances,” says Brian Walsh, ​​head of advice and planning at digital bank SoFi. “This is probably one of the biggest challenges we come across when were working with young professionals.”

Rather than trying to conform to the 50/30/20 model as soon as you graduate college, give yourself a five-year window to work up to your optimal savings level, Matthews suggests. By that point in your career, you’ll likely have enough work experience to obtain a higher-paying job, either by climbing the corporate ladder at your current employer or getting a new job entirely. 

People who establish good money habits in their early or mid-20s have a window of opportunity each time they get a raise or take a new job with a higher salary, Walsh adds. “What people decide to do when they get a raise or they get a bonus has a much bigger effect on their overall financial well-being,” he says. If you can maintain your current budget and lifestyle, or even increase your budget by half of your new income level, you can work up to that 20% goal without feeling deprived. 

If you work for an employer that offers any kind of a match for retirement account contributions, prioritize your savings to ensure that you contribute at least enough to get it. “Make sure you get every single cent of the employer match. It’s a 100% return on your investment,” Finke says. Remember, those employer contributions count towards that savings percentage, so a 50% match on your 6% contribution would bring you within striking distance of that 10% savings goal.

Likewise, paying off high-interest credit card debt and building an emergency fund should go to the top of every young adult’s to-do list, Pennington says. New credit card interest rates are at a record high of 20.74%, according to Bankrate.com, which means that even a small outstanding balance can quickly become a big drag on your finances. 

“Usually if there's high interest debt, that's the place we start,” she says. “If someone has debt and they don't have enough extra money to pay towards the minimum, don't have an emergency fund and have no way of building one, ending up with credit card debt can be a lot more dangerous.”

And while it might sound counterintuitive, Matthews advises against trying to make the 50/30/20 model work for you by slashing the 30%—the part of your budget that goes towards discretionary purchases. “I never recommend taking that to zero because it’s just human nature—it’s like a crash diet. If you deprive yourself of everything, you’re going to overspend and put yourself in a much worse position,” he says.

Read More: How to Reset Your Thinking Around Spending Money, According to Experts

The bottom line, financial planners say, is that budget models can be helpful starting points, but they should reflect your personal financial priorities and be revisited as your financial situation changes over the years. The 50/30/20 formula works best when you can adhere to it well enough that the money habits it helps you instill become permanent. 

“The most important part is dealing with the emotional side of finances and making small, short-term changes that really add up,” Walsh says.