The 50/30/20 rule is a well established savings rule first put forward by American senator, Elizabeth Warren.
However, many people feel that although it is simple in its premise, it’s actually far too ambitious to live on unless you earn a substantial income. Because of this, there are still a large number of people out there looking for a substitute savings rule that has the same sleek simplicity, but is manageable on a more moderate salary. Does this sound like you? If so, then the wait is over.
Ready to enter the 70/20/10 rule?
Working on the same three tier premise as the 50/30/20 rule, the 70/20/10 rule divides its categories along slightly different lines and in different weightings.
- Living expenses
Living expenses: 70%
Living expenses are everything from; rent, to bills, to nights out, to petrol for your car. In short, everything it takes to get you from one end of the month to the other. By putting everything that it takes to “live” into one category you are creating a simple structure for yourself to build your savings around.
It also means that you don’t need to choose between “needs” and “wants” like you do with the 50/30/20 rule. By putting it all together in one category you are giving yourself permission to take control over what you spend your living allowance on without added unnecessary strings.
Savings are (obviously) money you put aside for the future. 20% of your net salary should go towards these. Remember, though, that although this category puts savings all together into one, that there are actually a number of different savings you should be making.
For example, you should be putting money towards your pension, your emergency fund, and any other short or long term goals like weddings or holidays. For this reason there are many incarnations of this rule that recommend you break down the savings category into sub percentages (such as 10% for pension and 5% for individual saving accounts). However, if you feel that your salary already makes it difficult to make 20% savings, then subdividing this sum again can be difficult, even disheartening, as it can take a substantial amount of time to build up any meaningful sum of money.
However, if you start to set up a savings step in Oval, you will see that saving small amounts at a time can lead to great results.
Instead, think about what your current savings priority is and save for that. Then, once that is achieved, move to the next. For example, an emergency fund should always be a priority, so many would recommend that you first build up this before you think of saving for a wedding or holiday.
Debt payments: 10%
Again, this category lumps all debt in together, but we all know that not all debt was made equal. It makes sense to prioritise high interest debt and pay that off first.
Pay off the most damaging debt first, and then concentrate on paying off the rest as quickly as possible to stop yourself getting stuck in a damaging cycle of paying-off only the interest, without making a dent in the debt itself.
Clearly, as with all savings rules, this guideline is open to alterations. If one month you decide to put 30% of your salary towards savings, then you will need to adjust your other categories to ensure you still have a round 100%.
The most important thing to do is to find a system that works for you, and lets you build the financial future you deserve.