The 1/3 Rule Of Financial Planning

Researchers claim this rule can help prevent you from ever going bankrupt

Photo by Melinda Gimpel on Unsplash

What if I told you that the best budget you’ll ever use is the one that gives every dollar a job—and splits your income into perfect thirds?

That’s the argument behind a fascinating new study that merges math, psychology, and game theory to tackle one of personal finance’s biggest problems: why so many people, despite knowing they should save more and spend less, still end up broke.

The rule is simple: divide your after-tax income into three equal parts:

1. 1/3 to debt repayment

2. 1/3 to savings.

3. 1/3 to living expenses.

That’s it. No complicated apps, no color-coded envelopes, no budget spreadsheets that require a degree in Excel.

I’ve written in the past that I am typically not a fan of using these kinds of rules of thumbs as a literal financial game plan—But this one, at least, has some research behind it, so I thought it was worth reviewing to see if there’s anything useful we can learn.

The 1/3 Rule

The authors set out to answer a simple but profound question: can a simple rule like splitting your income into thirds prevent household bankruptcy better than other budgeting models?

To find out, they analyzed the 1/3 Rule using:

• Mathematical modeling: to see if it optimizes utility (economist speak to say happiness) and minimizes bankruptcy risk

• Game theory: to test if the rule holds up in multi-person households

• Behavioral finance: to examine how the rule mitigates cognitive biases

• Empirical data: to assess whether households following the rule actually do better over time

In other words, they wanted to know if this simple budgeting rule could hold up against both human nature and economic volatility.

What They Found

Let’s start with the big-picture finding: households that follow the 1/3 Rule experience 20–30% lower bankruptcy risk and pay off debt 25% faster than those using more traditional strategies like the 50/30/20 rule.

Why? Because the 1/3 Rule enforces discipline and balance. Here’s what each third accomplishes:

• Debt repayment: Keeps high-interest liabilities from spiraling out of control.

• Savings: Builds an emergency fund and buffers future income shocks.

• Living expenses: Keeps lifestyle inflation in check.

It also turns out that this rule isn’t just practical—it’s mathematically elegant.

Using utility maximization theory, the authors show that equal allocation of income across the three categories maximizes financial well-being while minimizing the probability of financial collapse. In a sense, it’s the Goldilocks allocation: not too much in any one bucket, just right in all three.

Does that mean this rule works for everyone?

No.

In fact, I would not even say this plan is optimal for most people. But it does reflect a basic reality that having literally any strategy for what to do with your money will likely put you in a better position, because most people have no strategy whatsoever when it comes to money.

How you can adapt this to your circumstances

Like with any financial rule of thumb, if your going to try it out, the number one rule is to break the so-called ‘rule’ to ensure that it is realistic and sustainable given your circumstances.

That's why I was glad the authors acknowledged this reality and discussed how the 1/3 rule can be used more flexibly.

• If you’re income is volatile , its more important to build savings portion and build a bigger emergency fund to get through lean months.

• If your living costs are unusually high, you can tweak the ratio temporarily—say, 40% to living, 30% to savings, 30% to debt—and gradually move toward balance over time.

In fact, the rule still holds as a baseline, even in stressful financial environments. Simulations showed that during a 30% spike in inflation (an extreme scenario), households using the 1/3 Rule still preserved their savings and avoided default better than those using other budget models.

What The Data Showed

To validate the theory, the researchers used U.S. Census and Bureau of Labor Statistics data from 2018–2022 and simulated different household types applying the 1/3 Rule:

• Single-income households: Paid off $63,000 in debt in under 5 years, built savings over $74,000, and lowered bankruptcy risk by 30%.

• Dual-income households: Paid off $120,000 in debt in 4 years and saved over $162,000.

• Multigenerational households: Also showed substantial risk reduction and financial stability improvements when applying a “nested” version of the 1/3 Rule—each individual splits income into thirds, then pooled funds are split again collectively.

Compared to traditional rules like 50/30/20, the 1/3 Rule outperformed across the board in terms of debt clearance speed, emergency fund growth, and overall resilience.

Again, I tend to have a bias against simple rules of thumb—This one at least has more thought and research behind it compared to many other popular rules of thumb in the financial space.

Remeber, no matter what strategy you pick with your money you need to ensure that it is flexible enough to work given your current circumstances.

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This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.