Ever heard of the 70-20-10 rule for personal finance?
Today we'll explore this popular (but often misunderstood) financial guideline and explain what it is and if it really works.
And if it does work, is it practical for those grappling with substantial debt?
What is the 70-20-10 rule?
The 70-20-10 rule has been floating around for years.
While its roots are not pinpointed to a single origin, it's widely cited by personal finance experts and even has some basis in religious traditions like tithing.
Simply put, the rule suggests that you allocate:
The appeal of the 70-20-10 rule
Why has the 70-20-10 rule gained traction?
Simplicity.
It's a straightforward formula that anyone can follow. No financial degree required.
The 70-20-10 rule hands you a ready-made blueprint that's easy to remember for divvying up your income.
Pros and Cons of the 70-20-10 rule
While the 70-20-10 rule offers a straightforward path for budgeting, it's not a one-size-fits-all solution. Here's a balanced look at its advantages and disadvantages:
Pros
Simplicity: One of the rule's biggest appeals is its simplicity. With just three percentages to remember, it makes budgeting accessible, even if you're not a financial wizard. It's an easy way to categorize your expenditures without getting lost in a labyrinth of spreadsheets.
Prioritizes essential spending: The rule inherently prioritizes your essential living expenses by allocating 70% of your income towards them. This ensures that necessities like rent, utilities, and groceries are covered.
Incentivizes saving: With a dedicated 20% going to savings, you're automatically fostering a habit of financial prudence. Whether it's an emergency fund or investments, this portion can secure your financial future.
Flexible "giving" category: The 10% allocated for giving or debt repayment brings in a humanitarian aspect, emphasizing generosity or prioritizing the reduction of financial liabilities. It's a pocket that serves dual purposes, according to your current needs.
Cons
Lack of nuance: Life is often more complicated than a three-category budget can account for. If your living expenses consume more than 70% of your income, you could find yourself unable to adhere to the rule without strain.
May be inadequate for debt repayment: For those buried in high-interest debts, setting aside just 10% may feel like emptying an ocean with a bucket. You might require a more aggressive strategy to avoid snowballing interest.
Not tailored for varied income levels: If you're a high earner, a 20% savings rate might not be ambitious enough to meet your financial goals. Conversely, for those on the lower end of the income spectrum, a 20% savings rate might be unattainable.
No room for unique financial goals: Whether it's saving for a child's education or financing a once-in-a-lifetime trip, the rigidity of the 70-20-10 rule may not accommodate these objectives.
Tailoring the 70-20-10 rule: Can it be modified?
Of course!
If the 70-20-10 rule doesn't perfectly fit your financial situation, remember that it's just a guideline. Here are some tweaks you might consider:
Remember, the 70-20-10 rule is a framework for financial stability. Sometimes life circumstances require you to temporarily bend or even break the rules.
Financial Health Check: A Reality Test
Before you jump on the 70-20-10 bandwagon, it would be wise to take a hard look at key financial indicators like your debt-to-income ratio and credit score to assess your true financial situation ... and whether the 70-20-10 rule is right for you.
Generally speaking, a DTI of 35% or lower is considered healthy by most financial experts. Ratios between 36% and 49% are cause for caution and may warrant attention to reduce debt and improve financial stability. A DTI of 50% or higher is considered alarming and indicates that a significant portion of income is going toward debt repayment, which leaves little room for savings, investments, or other expenses.
Facing financial reality: When traditional budgeting falls short
Sometimes, the gravity of your financial situation can't be mitigated by conventional guidelines like the 70-20-10 rule.
Like having a serious health condition that won't be cured by a change in diet alone, sometimes aggressive intervention is essential.
If you're struggling with excessive debt, a strategy like debt settlement might be warranted.
Donaldson Williams specializes in settling debt for less than full balance as an alternative to bankruptcy. Depending on your debt total, your debt relief could be thousands (or tens of thousands) of dollars.
Schedule a free, no-obligation phone consultation with us today to see if you qualify for debt relief. It's a critical step that could drastically alter your financial trajectory for the better.
Conclusion
The 70-20-10 rule can be a useful guide, offering a simple and straightforward way to budget and save. For those with minimal debt and a stable income, it could be a helpful roadmap to financial stability.
On the other hand, if you find yourself swamped with high-interest debt or unexpected expenses, you might need to explore a more aggressive approach like debt settlement.
