What is the 10/20 Rule and How Can It Help You Manage Debt and Save Money?

As a financial planner, I see many military families’ spending habits up close. One thing in particular sticks out: among my clients, the least financially stressed are families and individuals whose debt accounts for less than 10% of their monthly budget.

When it comes to budgeting and debt management, the 20/10 rule can help you determine whether you have too much debt and serve as a guide for future purchases.

The 10/20 rule is a simple but effective budgeting strategy that can help you get a handle on your debt and start saving money It’s a great option for anyone who wants to take control of their finances and build a more secure future

What is the 10/20 rule?

The 10/20 rule is a budget guideline that breaks down your after-tax income into three major spending categories:

20% of your income goes into savings: This is your “pay yourself first” money. It’s important to set aside money for savings every month, even if it’s just a small amount. This money can be used for emergencies, retirement, or any other financial goal you have.
10% of your income goes toward debt repayments: This includes any debt you have, such as credit card debt, student loans, or car loans. By dedicating 10% of your income to debt repayment, you can start to pay it off faster and save on interest charges.
The remaining 70% of your income goes toward all your other living expenses: This includes housing, food, transportation, and entertainment.

This rule is sometimes called the 70-20-10 rule or the 10-20 rule for short. It’s a simple and flexible way to manage your money and reach your financial goals.

How can the 10/20 rule help you?

The 10/20 rule can help you in several ways:

It can help you get out of debt faster: By dedicating 10% of your income to debt repayment, you can make significant progress on paying off your debt. The faster you pay off your debt, the less interest you’ll pay in the long run.
It can help you save more money: By setting aside 20% of your income for savings, you’ll be building a financial cushion for the future. This money can be used for emergencies, retirement, or any other financial goal you have.
It can help you live within your means: The 10/20 rule can help you track your spending and make sure you’re not spending more money than you earn. This can help you avoid debt and live a more financially secure life.

How to use the 10/20 rule

Using the 10/20 rule is easy. Just follow these steps:

Calculate your after-tax income: This is your income after taxes have been taken out.
Multiply your after-tax income by 20% and 10%: This will tell you how much money you should be saving and putting towards debt repayment each month.
Set up a system for automatically saving and paying off debt: This will make it easier to stick to your budget and reach your financial goals.

There are many different ways to set up a system for automatically saving and paying off debt You can set up automatic transfers from your checking account to your savings account and debt repayment accounts You can also use a budgeting app to track your spending and make sure you’re staying on track,

Pros and cons of the 10/20 rule

The 10/20 rule is a great way to get started with budgeting, but it’s not perfect for everyone. Here are some of the pros and cons of the 10/20 rule:

Pros:

Simple and easy to use: The 10/20 rule is a very simple budgeting system that is easy to understand and implement.
Flexible: The 10/20 rule can be adapted to fit your individual needs and financial goals.
Effective: The 10/20 rule can help you get out of debt faster, save more money, and live within your means.

Cons:

May not be enough for everyone: If you have a lot of debt or high living expenses, the 10/20 rule may not be enough to help you reach your financial goals.
Doesn’t account for emergencies: The 10/20 rule doesn’t account for unexpected expenses, such as car repairs or medical bills.
May not be suitable for everyone: The 10/20 rule may not be suitable for everyone, especially those with low incomes or high expenses.

The 10/20 rule vs. other budgeting methods

There are numerous budgeting techniques available, and each has advantages and disadvantages of its own. For many people, the 10/20 rule is a good option, but it’s not the only one. Here are some other popular budgeting methods:

The 50/30/20 rule: This rule allocates 50% of your income to needs, 30% to wants, and 20% to savings and debt repayment.
The envelope budgeting method: This method involves allocating a specific amount of cash to each of your expenses each month.
Zero-based budgeting: This method involves allocating every dollar of your income to expenses, savings, or debt repayment.

The best budgeting method for you will depend on your individual needs and financial goals. It’s important to try different methods and see what works best for you.

Is the 10/20 rule right for you?

One excellent tool for budgeting is the 10/20 rule, which can assist you in living within your means, saving more money, and paying off debt. The 10/20 rule is a fantastic choice if you want to manage your money in an easy and efficient manner.

However, it’s important to remember that the 10/20 rule is just a guideline. You may need to adjust it based on your individual circumstances. If you have a lot of debt or high living expenses, you may need to allocate more than 10% of your income to debt repayment. And if you have a low income, you may need to allocate less than 20% of your income to savings.

The most important thing is to create a budget that works for you and that you can stick to. The 10/20 rule is a great starting point, but don’t be afraid to adjust it as needed.

What Is the 10/20 Rule?

I recently wrote about the 50/30/20 spending rule – well, the 20/10 rule is a similar helpful guideline.

Like the 50/30/20 plan, the 20/10 rule breaks down your after-tax income into three major spending categories:

20% of your income goes into savings
10% of your income goes toward debt repayments, excluding mortgages
The remaining %2070% of your income is used to cover all of your other living expenses.

That’s why it’s sometimes called the 70-20-10 rule or the 10-20 rule.

20/10 Rule Example for Military Members

Let’s examine the same Air Force E-6 case study from our previous 50/30/20 article to see how the 20/10 rule can assist you in developing a long-term financial plan that achieves your objectives.

Tech Sgt. At Robins Air Force Base in Georgia, 29-year-old Michael Smith resides with his dependents after serving for ten years.

Basic Pay: $3,987
Housing Allowance (BAH): $1,428
Subsistence Allowance: $407

Assuming a 12% federal income tax withholding plus FICA (social security and medicare) and 0% state income tax, he’d make about $5,045 per month after tax.

Smith already saves $1,009 each month to reach the 20% savings guideline. About half of that is going into his Thrift Savings Plan (TSP), and the remaining portion is being set aside for his kids’ college tuition and a down payment on his next car.

He does not have any outstanding credit card debt or student loans, so the maximum amount of consumer debt that Smith can incur under this rule is $504 per month (E2%80%99s 2010 threshold).

Smith can determine how much he needs in the bank using this threshold before going to the car dealership.

Assume Smith is dead set on a brand-new Jeep Grand Cherokee, which retails for about $40,000 (taxes and fees included).

Given a standard 30-month loan period and an interest rate of 5%, the borrower is able to borrow up to $26,000 at a maximum payment of $504% per month. That means he must save at least $14,000 for a down payment or look at a used model.

Budget Money Rules: 70/20/10 vs 50/30/20 – Which is BEST?

FAQ

What is the 50 30 20 rule?

The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.

What is the 40 30 20 rule in finance?

The most common way to use the 40-30-20-10 rule is to assign 40% of your income — after taxes — to necessities such as food and housing, 30% to discretionary spending, 20% to savings or paying off debt and 10% to charitable giving or meeting financial goals.

How do you calculate the 20 10 rule?

The 20/10 rule follows the logic that no more than 20% of your annual net income should be spent on consumer debt and no more than 10% of your monthly net income should be used to pay debt repayments.