How to Make the 55/25/20 Rule Work For You

Only one-third of Americans maintain a household budget.¹ No wonder so many of us are in debt! Budgeting is not taught in school, so it's no wonder so few of us know how to do it. We do whatever our parents did. If they spent freely with no thought of tomorrow, we do too. 

A 2017 report by MarketWatch found that half of American households have no saving or emergency fund.² About 50 percent are “concerned, anxious or fearful about their current financial well-being.”² 

While the idea of documenting every single expense may seem overwhelming, there is a simple formula for figuring out how much money should go in each bucket.

The 55/25/20 Rule

This rule is easy to follow:

• 55 percent of your income should be allocated for living expenses and essentials, such as rent or mortgage, groceries and transportation.

• 25 percent of your income should go to savings, investments and paying off debt.

• 20 percent of  your income should go toward the things you want, but don’t necessarily need.

An important note: the essential and flexible spending percentages are the maximum; you always want to try to go below these percentages if you can. Obviously, the things in your “want” category are going to be what you want to limit the most; essentials and savings--in most cases--should take precedence. However, everyone has their preferred spending method according to their financial objectives.

Implementing the Rule

Now that you know what the 55/25/20 budget rule is, it’s time to execute it. To start, take a look at your pay stubs to determine the exact amount of money you make every month. This amount will then be used as your budget's foundation. If you’re self-employed, be extremely detail-oriented when it comes to tracking your income versus your expenses, and don't forget about putting aside a portion of revenue for taxes. 

Once you know your monthly income, it’s time to track all of the bills, items and experiences you pay for every month. From your early morning donut to your heating bill,  you want to have a detailed list of every expense.  After that’s done, create categories according to the 55/25/20 budget rule and put each expense into its correct bucket. 

This exercise will provide you with a clear visual of your spending so you can have a better idea of what changes need to happen. While it may seem like a hassle at first, eventually, as you adjust your spending and saving habits, you’ll realize how helpful the rule is for not only your future, but also your peace of mind.