What Is The 70/30 Rule?

When I started earning my own money, it was overwhelming. The feeling of having the financial freedom to decide on how you handle your own income and finally buying the things that you want, and enjoying the fruit of your labor is liberating and motivating. It inspired me to work hard, so I can earn big.

After a few months, it hit me. I was working hard, but I didn’t have savings nor investments. I wasn’t paying for a house, nor a car, and only had clothes, shoes, and memories of my spending spree.

Young adults earning money but not saving any portion of their income for their future needs

It was difficult at first, and it seemed to limit. But the first time I was able to successfully saved a portion of my salary, then the month after, my motivation changed. I was still on-the-go to working hard, but my mantra changed to, “I will work hard so I can earn big, then spend some and save some”.

I started listing all of my regular living expenses for the month. I allowed myself to have spending money, inclusive of my needs and a few happy treats, allocated an amount for savings and debt, and the rest goes to investment.

There were a lot of budgeting strategies that I came across, and finding the most realistic for me, and my income was the perfect fit. How did I do it?

What is the 70/30 rule in finance?

What is the 70/30 rule in finance?

Some of us think that the only way to increase our wealth is by earning more income. Undeniably, not all of us were born wealthy and not everybody has high-paying jobs. But earning a minimum wage is not a hindrance to achieving plans. How can this be possible?

The greatest factor that can affect our wealth is – our spending habits. If we can learn how to prioritize our spending, we can achieve growth eventually.

The 70/30 rule in finance allows us to spend, save, and invest. It’s simple. Divide the monthly take-home pay by 70% for monthly expenses, and 30% is subdivided into 20% savings (including debt), 10% to tithing, donation, investment, or retirement.

Debt reduction must be a priority since paying a high-interest rate can cost a lot.  

Emergency funds must also be part of the plan since we cannot predict unlikely circumstances. Now, especially during this pandemic, the future seems unknown, but preparing for it at least financially will ease some burden in the future.

The best news is, following this rule, you got everything covered! You have specific allocations for expenses, savings, debt, investments, or retirement that can make you freely spend within budget without having to worry if you still have money, or even if you still have a future ahead of you.

Why do percentages work?

Since our income may increase or decrease, calculations based on percentages will help us deal with fluctuations easily.

If we earn $1,000 then 70% is 700, and if it increases to $10,000, then it will be $7,000. That’s it! It’s easier to determine 70% of your income (using a calculator), than doing trial and error on how to divide your budget.

Now, let’s consider a monthly take-home pay of $4,000.

What are the inclusions of 70%?

What are the inclusions of 70%?

Expenses basically list everything we spend money on such as rent, bills, emergency expenses, retail therapy, groceries, etc. If money is spent on it, it’s automatically considered an expense.

Note that we are doing the math for your monthly take-home pay.

Example, if you get $4,000 deposited into your bank account monthly, then: $4,000 x .7 = $2,800. So, every month, you are allowed to spend $2,800 on bills, utilities, shopping, groceries, and everything else.

If you don’t have to spend all of the 70%, then DON’T. Always remember that 70% or less is the real key and that 70% is your maximum.

The lesser you spend, the greater the chance that you can save or invest.

Budgeting so you don't go broke!

If in case you went over the budget, it’s the best time to make adjustments. Cut back on the unnecessary wants until you’re within 70%. You can reduce app subscriptions, your daily Starbucks coffee, or even with late fees.

If you know how to live within or even below your means, likely, this won’t be challenging. But if this rule is a struggle, you must probably do some real action. Don’t feel bad. Your sacrifices now will pay off later until you can avail of your luxuries back again.

How to achieve 20%?

So what is 20% of $4,000? $4,000 x 0.2 = $800/month. Savings is very important, and so is debt. If you can pay off debt early, you can convert the budget to savings or even to other specific goals.

If achieving a solid 20% of your take-home pay is difficult, don’t get pressured nor frustrated. You can put away as much as you can, then gradually increase the percentage as you continue.

Where does the last 10% of the income go?

Where does the last 10% of the income go?

Deciding on where to spend the $400/month is up to your preference. Various options include:

1. Giving of tithes

Some of us are firm believers that we must give back to God and the church the blessings we receive, which is 10% of what we earn.

2. Donating for a cause

If you are the type who is being called to help the needy, then you can spare 10% of your budget for a cause that you are passionate about.

3. Investing

Allocating money for some benefit in the future is a wise decision. It can also ensure our financial security in the future.

4. Retirement

Investing early for retirement will allow you to be self-sufficient and confident that you can manage certain circumstances that may arise in the future.

Bottom line

There may be times when we feel that we have to keep up with the world. Social media has greatly affected some of us, that we feel obliged to be socially acceptable, that we even opt to adapt carelessly, so we can build an image or maintain status.

If we become more prudent in handling our finances, we will realize that we can make better decisions and utilize what we have wisely and achieve our goals in the long run.

Consistently saving even of small amount will accumulate to considerably increased wealth. It may begin with baby steps, or even challenging, but doing it is always better than not doing anything about it at all.

“A simple fact that is hard to learn is that the time to save money is when you have some.” Joe Moore

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