Can You Handle The 40/40/20 Rule?

Can you truly live off the 40/40/20 rule? This extreme method of budgeting seems like a fast track way to build wealth, but is it sustainable? Let’s explore this rule and see if this would work on a $125,000 income. 

Basics: Based on Gross Income

• 40% is saved for taxes
• 40% is used for saving and investments
• 20% is used for your everyday lifestyle

Using this formula, let’s see an example based on a $125,000 income. 

Taxes = $50,000

Savings and investments = $50,000

Lifestyle = $25,000

It would be quite impressive for an individual to follow this method of building wealth. I can assure you would be on a fast track with that kind of savings and investments, but it does not seem sustainable for someone to live off of $25,000. I would also note that a 40% tax may seem high in this example, especially when you start adding deductions to your taxes. 

I think flipping the 40% towards lifestyle (meaning necessities, not wants) and 20% towards savings and investments seems more reasonable for the average person. What do you think?

-HC