The 70/20/10 budget rule is a concept that is applied in the context of financial planning and budgeting. It suggests a proportional allocation of income or resources across three categories: 70% for essentials, 20% for savings and investments, and 10% for personal enjoyment. The rule is aimed at promoting financial stability and balanced spending habits.
The rule will help you with budgeting and impulse spending. When you know exactly what you have to spend across the month and what you can spend it on, you will be able to better manage your finances and spending habits such as over spending on something you want without thinking about your needs.and be able to manage your wants and needs in a more disciplined way.
You need to work out your total income for each month, and then divide up into the percentages, and stick to it. This is one of the ways I personally manage my finances, and it has always helped me from over spending on stuff I don't actually need by not impulse buying too much. I know exactly what I have to spend and on what, and also allows me to put money away for a rainy day.
Now there are different variations of this rule; for example, in this one, 10% is for personal enjoyment, while in other variations, it is for paying off debt. I think it is important to have some money for your own personal enjoyment; otherwise, what is the point? Now obviously, if you are in debt, it is important to pay it off as quickly as possible, so I would probably use the 20% savings category in this example to go towards some of the debt.
You can adapt it to your circumstances as you wish; the important thing is to understand the money you have and how it is spent, and to prioritise what is important. You can even change the percentages. Another popular variation is the 50/30/20 rule, for example.
70/20/10 Budgeting Rule
70%: Essentials
The largest portion, 70%, will be allocated to covering your essential expenses. This category includes necessary and recurring costs such as housing, utilities, groceries, transportation, etc. These expenses are essential for maintaining a comfortable and secure lifestyle. By dedicating 70% of your income to these necessities, you ensure that your basic needs are met and that you can sustain your day-to-day life.
20%: Savings and Investments
The next component of the 70/20/10 rule is to allocate 20% of your income towards savings and investments. This category focuses on helping you build some financial security and prepare for the future. It includes contributions to retirement accounts, emergency funds, and long-term savings. It may also involve investing in things such as stocks that can generate growth and provide returns over time.
By setting aside 20% of your income for savings and investments, you will have a nest egg to fall back on when you need it. Knowing you have some money for an emergency situation if needed takes a big mental burden off your shoulders and can have a positive impact on your wellbeing.
10%: Personal Enjoyment
The remaining 10% is allocated to your personal enjoyment, as everyone needs to enjoy themselves! This category will allow you discretionary spending and the opportunity to treat yourself to things that bring you joy and happiness. It may include dining out, entertainment, hobbies, vacations, and other non-essential purchases.
This allows for a healthy balance between responsible financial management and enjoying yourself. While it is important to prioritise essentials and savings, this category acknowledges the importance of rewarding yourself.
Benefits of the 70/20/10 Rule:
Financial Stability:
The 70/20/10 rule will provide you with a framework for balanced spending, ensuring that a significant portion of your income is allocated towards necessities, reducing the risk of overspending and financial strain.
Responsible Spending Habits:
The rule encourages conscious spending and discourages excessive indulgence or impulsive purchases, promoting a more disciplined approach to managing your finances.
Flexibility and Enjoyment:
The personal enjoyment category allows you to allocate a portion of your income for discretionary spending, allowing for enjoyment and helping you maintain a healthy relationship with money.
70/20/10 Budgeting Rule FAQ:
What is the 70/20/10 budgeting rule?
The 70/20/10 budgeting rule is a guideline for allocating your income towards different financial goals. It suggests that you should allocate 70% of your income towards living expenses, 20% towards savings and debt repayment, and 10% towards fun activities.
How do I determine my living expenses?
Living expenses include essential costs such as rent/mortgage, utilities, groceries, transportation, and insurance. To determine your living expenses, track your monthly spending in these categories and calculate the average amount.
What are long-term financial goals?
Long-term financial goals refer to saving for big-ticket items or future plans such as buying a house, starting a business, or funding your children's education. This category can also include investments or retirement savings beyond what is covered in the 20% allocation.
Can I adjust the percentages to fit my situation?
Yes, the 70/20/10 rule is a guideline that can be adjusted to fit your individual circumstances. For example, if you have high living expenses or significant debt, you may need to allocate more than 20% towards debt repayment and savings.
What if I can't save 20% of my income?
If you're unable to save 20% of your income initially, start with a smaller percentage and gradually increase it over time as you pay off debt or reduce expenses. The key is to prioritize saving and make it a habit.
Is the 70/20/10 rule suitable for everyone?
The 70/20/10 rule is a general guideline that may not work for everyone. It's important to customize your budget based on your individual financial goals, income level, and expenses. Consider consulting with a financial advisor to create a personalized budgeting plan.
0 comments:
Post a Comment