What Is The 70/30 Rule In Personal Finance?

What Is The 70:30 Rule In Finance?

The 70/30 rule in personal finance is an easy way of budgeting to maintain a good spending habit.

It can be daunting to know what to do with the money you have in your hand, especially after payday with many responsibilities standing at your doorstep.

You may be confused over how much to save, invest, spend, and give to charity.

With the pandemic making the future uncertain, people take savings and investments seriously.

The knowledge that the government could restrict movement at any time makes us eager to have a bit of security.

Thus, having a part of your money stored away is a necessity.

Knowing how to do that without getting frustrated or puzzled is a skill you need to have. 

Also, while the common belief is that high income leads to wealth, experts have advised good spending habits as a foundation for wealth.

A money habit that differentiates rich from poor is that while the poor spend their money and save what is left, the rich keep their money and spend what is left.

This means if you want to be wealthy, watch the way you spend and make savings a priority, not an afterthought.

You can have a high-paying job yet struggle with bills if you do not manage your income right.

An excellent way to do this is with a solid budget plan.

There exist various formulas and budgeting strategies as regards managing your finances.

The 70/30 rule is one of these strategies that can help you manage money.

This rule ensures that you save, spend, invest, clear off debts and do some good through charity.

You become more intentional with your money, leading to improvement in your financial status.

If you need to know how to budget better, the 70/30 rule in finance is a realistic plan for you. 

Why Do We Use Percentages?

Life circumstances and changes fluctuate our income. It could either increase or decrease.

Using percentages to calculate will enable you to adapt to modifications in your income.

Whether you earn $1,000, $5,000, $100,000, or more, the 70% / 30% formula can be applied easily.

It’s a flexible, accomodating strategy with tremendous rewards.

Your relationship with money improves, you gain more confidence and better financial habits. 

What is the 70/30 Rule?

The 70/30 rule in money management gives us a guide to split up our income to cover expenses, savings, investment, and charity.

It also aids in paying debt right after you pay your tax and have your remaining net income.

The rule classifies your monthly earnings as follows:

  • 70% goes towards expenses
  • 30% is kept for savings, investments, debts, and charity.

Related: Why Is Personal Finance Important? 10 Vital Reasons

Where Does 70% of the Income Go?

Expense is a generic term for anything that requires you to spend money.

It takes away from your income to provide you with your needs and extra wants. 

Expenses include the following:

  • Bills
  • Bank loans
  • Mortgages
  • Shopping
  • Emergencies

Bear in mind that you do not have to completely use up 70% of your income on expenses if they are less than the above on your budget.

70% is the maximum, but not a percentage set in stone. But the less you spend, the better for you.

However, it does not mean you should be a miser. Ensure that your needs are met and do consider some wants too. 

You also should keep track of your expenditures to avoid going overboard.

Some tools like the spreadsheet can help you achieve this.

Noting your expenses enables you to map out your spending pattern and make changes if need be.

Put the expenses into categories: groceries, bills, loans, food, etc.

Your bank statement is another way to know what you do with your money.

Overall, the 70/30 rule guides you towards living on 70 percent of your income.

This way, not only do you live below your means, but you also work towards building wealth, having a secure source of money, and being debt-free with the remaining 30%.

Related: 20 Personal Finance Tips For Financial Success

Where Does 30% of the Income Go?

The remaining 30% is further subdivided into 10% x 3. Give, invest, save.

These are financial habits you need to develop alongside controlling your spending. 

1. Charity

The first 10% goes towards charity. Charity is what you give back to the community where you live.

It could involve tithe for church-goers, donations to a good cause, or even a meal for the homeless guy down the street.

Now, you may be tempted to overlook this and assume it is better to move the 10% into investment and savings, especially when you are earning the minimum wage.

You may think it would be easier to give out when you become wealthy.

However, it is not the amount that counts but the habit you are developing.

If you cannot give out 10% of $1,000, you will not be able to give 10% of $100,000.

In an odd way, it is easier to give out of less than to give out of plenty when you think about it.

10% of $1,000 is $100. 10% of $100,000 is $10,000. Which feels like a lot of money? 

Charity not only helps you put smiles on the faces of people, but it also brings on positivity which keeps you healthy mentally, physically, and spiritually.

Remember that wealth is not limited to money.

So, if your goal is to be wealthy, reach out to people with whatever you have.

10% of your income is a good start. 

2. Investing

The following 10% moves towards building riches by investing in something.

It could be a business, stock market, or even yourself.

You may have dreams to pursue, a skill to learn, or a side business you need to make profitable.

Dedicate 10% of your income towards this.

Remember that you are not just working; you also need to build.

3. Savings

The last 10% goes into savings. Here, you need to be disciplined towards making sure you have money somewhere that you are not tempted to spend.

It could be a lifesaver one day.

However, if you have any outstanding debt, the 10% should go towards clearing it.

Also Read:

Bottom Line on the 70/30 Budget Rule

There is a story that goes this way:

Twenty years ago, two people each made $ 1,000 a month, and they each made the same increases over the years.

One had the philosophy of spending money and saving what’s left; the other had the philosophy of first saving and spending what is left.

If you knew them both, today you would call one poor and the other rich.

Simplistic? Sure, but there is a lesson to be drawn from it.

Unless you are hoping to win a lottery or you have an inheritance, building your wealth falls on you.

With the 70/30 rule in finance, it gets easier and less daunting to take control of your finances.