22 Mar, 2023

What's The 30/70 Rule? - Simplify Your Finances

What's The 30/70 Rule? - Simplify Your Finances
Written by: - Phil Baker

There are many ways to manage your finances, but perhaps the easiest way is the 30/70 rule. As it is based on percentages, even if your income amount changes, you can still apply the rule to your finances. 

We take a look at the 30/70 rule to help you simplify your finances. 

Also read: 8 Personal Finance Apps For Your Better Future

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Although it is called the 30/70 rule, let’s start with the larger percentage. The 70% of the 30/70 rule refers to the amount of your income every month that should be put aside for expenses. 

For example, if your net income for the month is $5000, you would put 70% or $3,500 to one side to pay for all your monthly expenses. Net income is what is left after you have paid your taxes and other contributions. 

Expenses consist of things like rent, grocery shopping, bills such as electricity, gas or phone. They are the basic things that you use every month and so need to be the priority when you receive your paycheck. 

If you currently spend more than 70% of your income on expenses, then look at what you can eliminate. Choose something that is a non-essential item, such as subscriptions or activities. 

Also read: How To Budget Wisely With The Assistance Of Budget Apps



The 30% of the 30/70 rule should be put towards savings and debt, although it can be divided into 20% and 10%. On a net income of $5,000, 30% would give you $1,500 for savings and debt payoff. 

If you use 20% of your income for savings and debt reduction, you will have $1,000 from a net income of $5,000. The other 10% or $500 can be either donated to a charity or you may want to invest it. 

Your priority should be paying off high-interest debt as quickly as possible. If you can’t afford to use 20% or 30% of your income for this, put aside what you can, 10% to begin with and build it up over time. You will then have a reserve of money in the bank for emergencies.

Also read: How To Organize Your Financial Records In 5 Easy Steps


Investments Or Donations

With the 20/10 split of your 30% of income you can use the 10% to either donate to a worthy cause or invest it in your future. On a net monthly income of $5,000 that’s $500 that you are putting aside each month. 

You could put it into a retirement account, buy some stocks and bonds or any other investment that you are interested in. If you want to invest but are unsure how to go about it, get yourself some financial advice. 

If you decide to donate to a cause you believe in or a religious institution that you attend, these are tax deductible. Not only will it benefit you financially, but it will also give you a sense of giving something to those less fortunate. 

Also read: How To Boost Credit Score Quickly


Using Budget Percentages

The use of percentages when budgeting makes the whole process a lot easier. You can use the same percentages regardless of how much income you make and this helps you stay on track. 

If you used a dollar amount instead, during a month when you have a larger income you may be tempted to see it as disposable income

But sticking with percentages means that if you have a bumper month with your net income your spending, saving, donating or investing amounts will be higher too. 

Using budget percentages also means that you will have everything covered every month. Your expenses will be paid, you will be saving regularly and your investments or donations are also set aside. 


Managing The 30/70 Rule

Of course, some people have a variable income and their net monthly income can change frequently. This applies to those on commission, service or tip based income. If you have net monthly income that is inconsistent, take an average over three months. 

Add three months of your net income together to get your total and then divide it by three. This will give you an average that you can work with. Of course, some months you will take home more and some months it will be less but the 30/70 rule can still work for you. 

Some people may be able to tweak the 70% if they don’t need the whole amount to pay their expenses. If you can live off 60% of your income then that leaves you 40% to save, invest or donate. 

Categorize your expenses and use something like a spreadsheet to keep track of what you're spending. If you use a credit card, use your statements to note down your expenses. For those who prefer to pay with cash it will be a little trickier to track this so perhaps use a debit card instead. 


Dealing With Debt

You should prioritize your high interest debt such as loans and credit cards when setting money aside for debt repayment. Make sure that you pay off anything that may be hurting your credit score as quickly as possible. 

With a better credit score you have more options to refinance other debt for a better interest rate. This can help make your long term debt more manageable and less of a burden in the future. 


Managing Savings

With your 30% of non-expense income you can split 20% of it into family savings and emergency savings. 

Putting 10% of your income into an emergency savings account will help with any unexpected expenses and a monthly amount into a family savings account is a great way to save for a vacation, new furniture, or a long term family project. 

Also read: How To Calculate Retained Earnings?


Final Thoughts

Not everyone is good with complicated bookkeeping so the 30/70 rule is a great way to simplify your finances and make them more manageable. The most important part of the rule is to make sure that you set that 70% aside for paying off your expenses every month. 

The remaining 30% can then be divided into savings, investments or donations. 

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