What is the key to Financial freedom? Well, it’s not the amount you have. This is how you spend your money.
The reason? To build and maintain wealth, you must live below your means, as well as avoid debt. It is well known among millionaires that spending less than you earn opens the door to more opportunities. Your money can be invested, saved or donated to a charity of your choice. In a perfect world, you’d be able to do all three.
And, that’s where Jim Rohan’s top piece of financial advice enters the ring.
The 70/30 rule
For those unfamiliar, Jim Rohan is an entrepreneur, author and motivational speaker. As a guide to spending, saving, investing and donating 70/30 rule can be used.
Why might this be effective? The biggest hurdle for most people is living on 70% of their after-tax income, which includes all necessities and luxuries. An additional 30% is allocated to investments, savings and charities.
In short, keeping your expenses under control and Commit to budget It is necessary if you live on less than you. You can’t save, invest, pay off debt, or give reasons to care for yourself when you’re living paycheck to paycheck. Again, living paycheck-to-paycheck is not always the result of insufficient income.
In Willis Towers Watson’s survey Conducted in 2022, 36% of six-figure earners lived paycheck-to-paycheck, a percentage that has doubled since 2019. In addition to record inflation, a lack of proper money management strategies can also contribute to the problem.
Money can easily go unplanned when you spend without planning and you don’t get paid until the next month’s income comes in. Better than this? Eventually, this becomes a habit.
According to Thomas Corley, who spent five years studying the daily habits of more than 350 rich and poor people, self-made millionaires create a savings habit. Early savings will help you accumulate more wealth. During their pre-millionaire years, 94% of the self-made millionaires in my study developed the habit of saving 20% of their income.
Thanks to Jim Rohan’s 70% Budget Rule, you can break free from the paycheck-to-paycheck cycle. Additionally, you can immediately use this advice to save, invest, pay off debt, and donate.
70% breach of budget rule
Despite the fact that this rule seems fairly straightforward, let’s break it down further so that you can finally set a budget that works for you. However, to simplify this rule, it has been modified to the 70/20/10 rule.
In this case, your take-home pay is divided into three buckets based on certain percentages:
- Most of your income, 70% goes to monthly bills and everyday expenses.
- 20% goes towards savings and investment.
- 10% goes towards debt repayment or charity.
The goal of this ratio is to invest in your long-term financial well-being as well as your current lifestyle. Also, the 70/20/10 rule can be tailored to your niche financial situation.
Use 70% of your income for monthly expenses
Regardless of the variation you use, this part is non-negotiable. This means not spending more than 70% of our monthly income on living expenses. But what does that really mean?
There are two types of living expenses:
- Essentials like food, rent and utilities.
- Discretionary, such as a new pair of shoes, eating out and entertainment.
The 70% rule is a good guideline for having enough money for essentials and discretionary spending so that we can afford everything we want and need in life. You can use the remaining 30% to save more money and pay off debt, whether it’s credit card debt, a utility bill that’s overdue, or other personal debt.
Difference between fixed and variable costs.
Budgeting requires understanding monthly expenses and distinguishing between fixed and variable expenses.
fixed costs.
A fixed expense is one that remains the same on a monthly basis. Some common examples include:
- Mortgage or rent payments
- Utilities – Usually variable, but some utility companies also offer programs that estimate your average monthly costs so you pay more regularly.
- Car payment
- Insurance premiums
- Subscriptions, such as streaming services or magazines
- Membership fees, professional organizations or gyms
- Child Care – You can add more for extra babysitting nights if needed
Variable costs.
On the other hand, variable expenses are those that change from month to month, such as:
- utilities
- Groceries
- Gas
- dine out
- Entertainment
- journey
- gift
While managing the budget, it is important to consider both types of expenses as they can take up a large portion of it. As such, to be a better money manager, you should be aware of fixed versus variable expenses on a monthly basis.
You should save 20% of your income
Saving for monthly living expenses and unexpected events is an essential part of everyone’s budget. This is why you plan to save 20% of your gross income in a 70% budget. This is an excellent goal, especially since just then 43% of US adults will use their savings to pay for unexpected emergency expenses.
You may want to consider the following personal finance priorities:
- Emergency Fund. In case of emergency, you can draw from you emergency fund. This is usually enough to cover basic living expenses for three to six months. But, start with a small amount like $1,000.
- Sinking funds. This is for major expenses like car repairs that may arise occasionally.
- Retirement savings. Some of the most common retirement accounts are 401(k), 403(b), and 457(b). Roth IRAs and traditional IRAs are also options.
- College Savings Plans for Your Kids through 529 Plans
- Start-up capital for business.
- Investing in stocks and bonds
- Real estate investmentsuch as a real estate investment trust or REIT.
If you don’t have money in your savings account for an emergency, building your emergency fund should be your top priority. As you pay bills, variable expenses may arise, so savings are also essential.
The good news is that you can save money for multiple savings goals at once. For instance, the thought of retirement seems far away. However, it is best to start early to reap the benefits of compounding.
Set aside 10% of your income to pay off debt or give to charity
You will Pay off debt Or donate the remaining 10% (or both). It might be a good idea to:
Payment of debts.
If you have debt, you can include it in this 10% category depending on your financial situation. However, you are not limited to spending less than 10% of your income on loan payments. As you may recall, student loans and other debts were included in the 70% category of expenses.
Minimum required payments on your student loans and other debts should be included in your budget. You can also send extra money to speed up the process of getting out of debt if the minimum payments don’t work.
This final 10% can be calculated however you like. It may be more beneficial to focus on paying off your debt rather than giving. Paying off high-interest debt quickly is especially important if it comes with a high interest rate.
There are two popular options when dealing with your debt:
- The Debt Snowball Method. Regardless of the interest rate, you start with the smallest debt.
- The debt avalanche method. As an alternative, you can pay off the debt with the highest interest rate first.
You should remember that your minimum debt payment comes out of your spending range when using the 70/20/10 budget. To quickly reduce debt, additional payments in the additional 10% category are required.
to share or give.
Giving something that is meaningful to you can be part of your final 10% category. You can give regularly to the same organization each month, or you may want to vary your donation, such as:
- Donating or tithing to a religious organization.
- Contributing to charitable causes.
- Donating to your college alma mater
FAQs
1. What is the 70/30 rule?
According to Jim Rohn, who is an author and motivational speaker, you should live on 70% of your income and save 30%.
70% includes all the needs and wants you have – housing, utilities, food and clothing. It also includes small pleasures and luxuries like vacations or dining out.
What about the remaining 30%? It recommends an equal split between savings, investments and donations.
2. Why use percentage of budget?
Instead of allocating a set dollar amount to each of your expenses, you should focus on percentages when creating your budget. The reason? By using budget percentages, you can see how your income is being spent on a monthly basis. Consequently, to identify areas where costs may need to be adjusted.
Additionally, a percentage-based budget ensures that every dollar you earn has a purpose. This is especially important when you feel like you’re not meeting your financial goals.
3. If you exceed the 70% budget rule, what should you do?
Do you exceed the 70% guideline? Don’t panic. Start cutting your expenses as soon as possible.
Of course, it’s easier said than done. But, to get started, take a hard look at your budget. From there, eliminate unnecessary expenses that are “wanted” that you can eliminate on a monthly basis. These can include dining out, shopping for new clothes, and subscriptions to streaming services. Continue deleting until you reach 70%.
If you still can’t fit it within 70%, what are your options? Be honest with yourself and take action. The solution may be as drastic as selling your vehicle or moving into a cheaper house.
There are other options, such as asking for a raise or a job change. If you want to generate multiple income streams, you may want to consider starting a side hustle.
4. What are the advantages of 70% budget?
Budgeting rules like 70/20/10 offer some great benefits.
The method is very easy to follow. By dividing your take-home pay into these three categories, you can spend it however you like without worrying about derailing your savings or debt repayment plans.
Although this budget has some structure, it is not overly restrictive or strict. Not every dollar needs to be spent in exactly the same way.
Moreover, this budgeting style puts your financial future first. Building an emergency fund, investing for retirement, paying off debt and giving back to others will all be part of your daily routine as well.
5. What are the disadvantages of 70% budget?
This budgeting method can prove difficult to maintain due to the inability to prioritize personal financial needs and wanting more than unexpected expenses.
People can use a credit card to buy things they can’t afford when they start out with such a budget. Due to interest payments, this can lead to a greater debt burden over time.
Buying a house or financing college tuition may not be possible with the fixed percentage model of the 70/20/10 budget strategy.
Retirement goals and emergency funds can also be affected by a limited amount of long-term savings.
When this model is relied upon too much, unintended consequences can occur. If not carefully monitored, steadily decreasing savings creates a cycle where you can’t save for retirement or necessities.
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