How To Manage Your Money With The 70-20-10 Rule. (2024)

Whether you are saving up to buy your first home, or are already on the property ladder, understanding how to manage your money effectively is important for achieving financial stability, especially in the current environment.

A tried and tested method is the 70-20-10 rule, which provides a straightforward way to allocate your income wisely, dividing it into three distinct categories. So, in this week's update, we will delve into the details of the 70-20-10 rule and how you can start to regain control of your money.

What is the 70-20-10 Rule?

The 70-20-10 rule is a simple framework designed to help you manage your finances. By breaking down your earnings into 70% for Essentials, 20% for your Wants, and 10% for Savings/Debt Repayment, you can establish a solid financial foundation.

So let’s break those categories down a bit further. The rule suggests that you should allocate 70% of your monthly income to cover all your Essential needs. Things you absolutely cannot go without. This includes housing, food, power, water, insurance and transportation.

The next 20% is designated for Wants. In the Wants budget you get to decide what you use it for. So this could be online streaming subscriptions, takeaways, gifts, clothing, health and beauty to name a few. Wants are things that you could probably go without if you had to. Keeping these “Wants” to just 20% of your total outgoings can really go a long way to keeping on top of your finances. A good attitude to have with your “Wants”, is that once you've spent it, it's gone, so you have to wait until next payday before spending again.

The remaining 10% is for Saving & paying off Debts. If you don't have any Debt then the whole 10% can go straight into savings. If you've got any debts that you're finding hard to pay off, then you can focus this money on your debt repayments instead.

How to Implement the 70-20-10 Rule

To implement the 70-20-10 rule, keep it nice and simple. Grab a piece of paper. Head up 3 columns with the following categories: Essentials, Wants, and Savings/Debt Repayment. Now write next to those headings how much of your income should go towards it. So, For example if you earn a combined income of $8,000 a month after tax, you would allocate as follows:

Essentials (70%) $5,600 Wants (20%) $1,600 Savings/Debt Repayment (10%) $800

From here you want to list all of your monthly expenses under the appropriate headings keeping the goal in mind that your Essentials can’t exceed 70% of your income. If they do, then you can either look to transfer some of those expenses into your Wants column or look at what you can cut out or reduce. It might be that you change your shopping habits to buy what's on special rather than your regular go to products or review your phone/internet provider to get a better deal.

Next, automate your Wants to ensure you consistently set aside 20% of your income. This could mean setting up a direct deposit into a separate account each payday.

Finally, focus on the 10% Savings/Debt Repayment. If you have debts, use this money to pay above the minimum payment to knock that debt off as quickly as possible and reduce the interest you pay in the long run. If you're debt-free, but looking to purchase a house, then funnel this money into your savings to boost that house deposit. The key with the 70-20-10 rule is consistency and ensuring that each percentage is put to work every month.

Applying the 70-20-10 Rule for Financial Success

The beauty of this rule is its flexibility; it can be tailored to fit your personal financial situation while maintaining a balanced approach to managing your money. It's important to adjust these percentages if you have higher debt or different financial goals. For example, if you're aggressively paying off debt, you may want to allocate more towards that category and less towards your Wants. The key is to start with the 70-20-10 framework and then tweak it to fit your unique financial situation.

The Impact of the 70-20-10 Rule on Your Financial Future

The 70-20-10 rule isn't just about managing your current income; it's a strategy that can significantly impact your long-term financial health. By consistently applying this rule, you create a disciplined approach that can lead to accumulating substantial savings and reducing debt over time. The 10% you save compounds, especially if invested wisely, leading to greater financial security in the future.Incorporating the 70-20-10 rule into your long-term financial planning can also prepare you for unexpected expenses and reduce the need to rely on credit. It's a sustainable approach that promotes a healthier financial lifestyle and peace of mind.

Whether you're just starting your financial journey, looking to reorganise your finances, or simply want a more robust plan, consider the 70-20-10 rule.

A tailored approach to managing your money today, could very well be the key to unlocking a more financially secure tomorrow.

Cheers,

Vicki ✨

The opinions expressed in this article should not be taken as financial advice, or a recommendation of any financial product. Vicki Kemp or Vega shall not be liable or responsible for any information, omissions, or errors present. I recommend seeking professional legal and/or mortgage advice for your own personal situation. My Disclosure Statement is available on request.