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The 40/30/20/10 budget: Pros, cons and who needs it

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Whether you're looking to pay down debt or save for retirement, being intentional about allocating your income can make it much easier to reach your financial goals. The 40/30/20/10 rule is a budgeting strategy that aims to help you do that. It's similar to the popular 50/30/20 rule but incorporates a "giving back" component that can make it easier to budget funds to support a charity or nonprofit.

This general approach can be helpful if discretionary expenses take up more of your paycheck than you'd like, though the exact formula may not be ideal for everyone.

What is the 40/30/20/10 budget & how does it work?

The 40/30/20/10 rule is a budgeting framework that separates what you earn into categories for spending your after-tax income:

  • 40% for needs. The biggest category for most people is day-to-day needs. This includes housing, utilities, transportation, health care and groceries.
  • 30% for wants. It can be easy to spend on discretionary expenses like eating out, shopping or pursuing hobbies. Setting a threshold gives you an allowance for feel-good purchases but still encourages you to prioritize other categories and work toward your short- and long-term financial goals.
  • 20% for savings and debts. Dedicating a substantial portion of your income to repaying debt and saving for the future puts you on the road to lasting financial health.
  • 10% for donations. This portion is the key part of this particular budget, with 10% consistently set aside to support causes and organizations that are important to you.

Example of the 40/30/20/10 budget

Let's say your household has $6,000 in take-home pay each month. With this budgeting strategy, that would mean you earmark $2,400 for needs, $1,800 for wants, $1,200 for savings and debt repayment and $600 for donations.

40/30/20/10 budget

$6000 net income, split into 40%, 30%, 20%, and 10%
40% needs = $2400, 30% wants = $1800
20% savings and debt = $1200, 10% donations = $600

Pros of the 40/30/20/10 rule

Allocating your income according to the 40/30/20/10 can contribute to your financial well-being in important ways.

  • It's easy to understand. No matter what's happening in your life, you're divvying up your income the same way.
  • You identify your actual needs. Without this distinction, it's easy to overspend on things or experiences that provide fleeting satisfaction. By capping your discretionary spending at 30% of your budget, you'll sort out needs vs. wants vs. wishes.
  • It gets you thinking long-term. When you're dedicating 20% of your after-tax income to fulfill savings goals or debt reduction, you'll build the credit and assets you need for future expenses like a home, college education or retirement.
  • Giving back is a priority. The 40/30/20/10 rule can help you live out your values by designating space in your budget for charitable giving.

Cons of the 40/30/20/10 rule

The primary benefit to the division rule—its simplicity—also can be its downfall. Having four basic but distinct portions requires regularly striking a specific balance in paying for your needs and wants and saving/reducing debt and donating. This can mean:

  • It may not account for your financial situation. If you follow the 40/30/20/10 allocation to the letter, you're putting the same portion of your income into each category regardless of how much you make or whether it fluctuates.
  • It doesn't fit well with every life stage. When you're young and either paying off substantial debt or raising a family — or both — it can be challenging to keep your household needs below the 40% ceiling. You may want to consider a different budget split until that limit feels comfortably attainable.

Who should use the 40/30/20/10 rule?

The 40/30/20/10 rule is a strategy to try if you're someone with discretionary expenses taking up a lot of their paycheck and want to prioritize donating to charities, it's easy to understand and apply. But because it's a one-size-fits-all concept, it's generally most helpful for those with a "typical" financial situation—not someone trying to save aggressively and retire early.

Ask yourself: Would adhering to this budget help me reach my financial goals without leaving too much or too little for needs? If the answer is no, you may want to consider a different budget type.

How to start using the 40/30/20/10 budget

Here are easy ways to get started using this budget, consider these strategies:

  1. Create accounts for each category. You may experience better results if you separate money for each spending category into different bank accounts. For example, if you have direct deposit at work, you might be able to assign a certain portion of your income to an account for necessary expenses and another portion to one for discretionary spending.
  2. Automate your savings. If you have a workplace retirement plan, your savings can be taken out of your paycheck automatically. But you also can set up an electronic draft that puts money into an IRA or an emergency fund every time you get paid. If portions of your income don't land or stay in your primary bank account, there's less risk of spending it.
  3. Make adjustments based on your situation. Think of the 40/30/20/10 rule as a starting point rather than a rigid budgeting tool. After trying it, find out how it affects things if you thoughtfully and intentionally increase or decrease the percentage going to a particular category. Once you have a formula that works for you, stick with it until you find you need to adjust again.

Creating a budget that works for you

Adhering to this or another budget is one of the best ways to prepare for the future and give back consistently. Your local Thrivent advisor can help you determine whether the 40/30/20/10 rule is the right approach for your financial situation.

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Concepts presented are intended for educational purposes. This information should not be considered investment advice or a recommendation of any particular security, strategy, or product.
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