Qiyang (Cliff) Lian
Ph.D., CPA, Assistant Professor of Accounting – University of Wisconsin – Green Bay, Cofrin School of Business
Do you think using a percentage-based budget strategy, such as the 50/30/20 rule or the 70/20/10 rule, is the most effective approach?
Percentage-based budgeting is an effective starting point thanks to its simplicity and ease of use. It offers a clear structure for prioritizing expenses into categories like ‘Needs’, ‘Wants’, and ‘Savings’. By further personalizing the percentages, we can tailor the structure to fit our financial situation and goals, making it a powerful tool.
A challenge, though, is that it is based on after-tax income. For individuals with highly variable incomes, complex tax situations, or those who are self-employed, it can be difficult to calculate the starting figure accurately. If this is the case, they may want to consult with an expert.
Who would benefit the most from using percentage-based budgeting strategies, such as the 50/30/20 rule or the 70/20/10 rule?
Individuals with stable, predictable incomes, such as W-2 employees, may benefit most from percentage-based budgeting. They are often just starting their financial journey or looking for a simple system to regain control of their spending.
For them, categorization and prioritization can be sometimes challenging. For example, should a monthly car payment be included in the ‘living expenses’ category because it is transportation, or in the ‘debt’ category? And should one save up (and even invest) or pay down debt first? Basic personal finance literacy is crucial. In some complex cases, an expert should be consulted.
What do you think is the best way to allocate money between necessities, luxuries, and savings?
We need to understand that it is often not a single, fixed formula, but rather a dynamic strategy affected by our financial situation and goals. It should be reviewed periodically and adjusted based on changes in life circumstances (e.g., job change, home purchase, new baby). Ultimately, the ‘best way’ to allocate money is one that is sustainable. It should build financial discipline and advance our goals while leaving enough room for some ‘Wants’ to ensure that the budget does not feel overwhelmingly restrictive or demotivating.
Source: Budget Percentages