What is the 70 30 rule?

Money for expenses. The 70 part of the 70/30 rule refers to what you do with 70% of your net income every month. That means if you receive $6,000 per month, you would take 70% of that, or $4,200, and use that to cover all of your expenses.

atxwoman.com - On The Money: Use the 70/30 Rule to Simplify Your Finances

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No matter your income, this formula can help you manage your money, allowing you to take care of the necessities and leave room for what matters to you. As we start a new year, better financial management usually tops many people’s resolutions. It’s a good goal to have and one we should keep year-round. But with so much financial advice out there, financial literacy can feel like an overwhelming task. In this column over the last few years, we have covered many ways you can save, invest and create more wealth. But if you’re still finding it hard to manage your money, perhaps this simple formula is the easiest route to take. It’s called the 70/30 rule and allows you more flexibility with how you spend by just setting some parameters. What’s great about this rule is it’s based on a percentage, not on a dollar amount. So even if your salary changes over time, you can still apply the rule; just recalculate it for your new income.

1. Money for expenses.

The 70 part of the 70/30 rule refers to what you do with 70% of your net income every month. That means if you receive $6,000 per month, you would take 70% of that, or $4,200, and use that to cover all of your expenses. If you make $3,000 per month, applying the 70% rule, your budget would be $2,100. Whatever your monthly income, 70% is the maximum amount you can spend on bills, groceries, gas, rent or mortgage payments, utilities, entertainment, clothes, etc. If your current spending exceeds 70% of your net income, then cut out as many superfluous activities and subscriptions as possible, consider getting a roommate or carpool with coworkers. Do whatever you can to get down to 70%. If you don’t need 70% of what you earn, instead of spending it, fit it into one of the other two categories.

2. Saving.

The remaining 30% is actually divided into two categories: 20% toward savings and debt and 10% for charities or investments. Using our previous examples, 20% of $6,000 would give you $1,200 a month for saving and debt payoff; 20% of $3,000 per month would be $600. Whatever the amount, the action is the same. This money’s purpose is to build an emergency reserve in the bank. If you can’t afford to do 20% yet, then just put away as much as you can and build it up to 20% over time by either earning more income or cutting your expenses. Paying off high-interest debt as quickly as possible should be your first priority.

3. Donating or investing.

Whether you believe in tithing, want to give to a cause you care about or just want to invest in your own future, the remaining 10% should go here. That $600 a month (or $300 if you’re basing it off a monthly payment of $3,000) could be put into a retirement account, used to buy stocks and bonds, real estate or other investments. Or you can donate to a religious institution you attend or a cause you care about, both of which are tax deductible. Some of the wealthiest individuals (as well as those who just want a simple way to keep their finances in check) use the 70/30 rule. By spending just a few minutes calculating these simple percentages, you can set up a budget that will keep your debt down, your spending reasonable and your ability to give still in the equation.

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