The 70/30 rule is an effective budgeting strategy that can improve your finances and set you on a path to financial freedom. When people first come to terms with financial freedom, they find it thrilling and somewhat overwhelming. That is because financial freedom means managing your income and, at the same time, being fully responsible for it.
While having financial freedom can motivate some to work hard, it can also make others spend recklessly. Whether a part of the former or the latter, budgeting strategies can and will help you save up, spend wisely, and even earn more. Here, we’re introduced to the concept of the 70/30 rule. So, what does the 70/30 rule have to do with any of this?
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What is the 70/30 Rule?
At its core, the 70 30 rule is just a budgeting technique. As with all budgeting techniques, its purpose is to help improve your money habits and make saving money easier.
So, how is the 70/30 method any better when compared to other saving methods? It all comes down to specificity. Whichever way you put it, budgeting is a struggle. The problem with most budgeting techniques is that they often leave you with more questions than answers.
Such questions often involve uncertainties regarding how much you should save, invest, and spend. For most, saying that they need to invest does not mean much. People know that they need to invest. What they do not know is how much they can comfortably spend or invest without being in the red.
The 70 30 rule makes allocating your money much less of a hassle. The 70/30 rule dictates:
70% of your monthly income becomes “spending money,” which you can use on everything – from necessities to luxuries.
30% are your savingsand investments
The rule is simple, effective, and serves as a great starting point for most. Where it truly shines, however, is its malleability.
How to Use the 70/30 Rule?
An essential step before using the 70/30 rule is to create a budget. A budget is the ultimate financial tool that allows you to achieve your financial goals and enables you to implement various financial methods to reach those goals. And we must remember that the 70/30 rule is a budgeting tool first and foremost.
So, the first step is to create a budget. Then, in the budget, you must outline your expenses and income. This first step is crucial as it would be impossible to know how much of your money is considered “spending money” and how much can be allocated to savings and investments.
Moreover, a budget will help you uncover where your money goes, enabling you to outline your finances and spending power accurately.
For example, if you spend more than 70% on necessities and luxuries, you must find areas to cut back. Doing this will allow you to reach the target of 30% investing and saving.
The 70 30 rule isn’t a rigorous one compared to other budgeting tools, such as the 50 30 20 rule or the 60 30 10 rule. Compared to these, the 70 30 rule gives you more flexibility, as it only requires putting aside 30% of your income to plan your financial future.
In short, here are the steps necessary to use the 70 30 rule:
Create a budget and outline your income and expenses
Allocate 70% of your income towards necessities and luxuries
Allocate 30% of your income toward savings and investments
If the numbers don’t add up, you can improvise and modify the rule until you hit the right balance. Feel free to implement variations of the 70 30 rule, such as 75 25 or 80 20 rule.
If You Can’t Achieve the 70 30 Rule, Improvise and Adapt
Sticking to an original budgeting tool can be difficult in itself. However, the 70/30 rule can be whatever you want it to be. Although, keep in mind that the more you alter it, the riskier it becomes. Let us consider a situation where a person wants to invest but also employs the 70/30 rule, which mentions nothing about investing.
As we stated, the rule can change. In other words, nothing is stopping that person from modifying it into a 70/20/10 ratio. Instead of having 30% as your savings, you can allocate 20% to savings and 10% to investing, and vice versa.
Many people are using a modified version of this rule, also known as the 50/30/20 rule. This way, most people allocate 50% for needs, 30% for wants, and 20% for savings. Regardless of which version of the rule you use, you can modify the ratio in whatever way you want.
According to OECD’s latest publication on household savings, we are currently witnessing a sharp decrease in household savings across the globe. This means that having a saving method is more important than ever, as it can ensure that you are allocating your money efficiently.
What Is The Golden Ratio of Investing?
It is advisable to have your money habits in check before you start investing. Whether you are following the 70/30 rule, the 50/30/20 rule, or any other version of the former, you should have a realistic idea of how much you can and want to invest.
Regardless of whether you need to be saving money, you should leave at least 50% of your monthly earnings for necessities.
For those who want to invest as much as possible, investing up to 50% of your earnings is still realistic. It would impact your everyday life significantly, but if it is a price you are willing to pay, it remains an option. Most people, however, are nowhere near that level of dedication.
Based on data from N26’s savings and spending of their European customers in 2021, very few Europeans managed to save over 23% of their overall income. Although 20% is close to the target, we must keep in mind that few European countries managed to reach the target. If you are near 20%, you can start looking for potential investments.
If not, you should probably remodel your budgeting ratio. It is worth adding that if you are interested in investing, you can check out the Warren Buffett 70/30 rule, which uses similar principles in order to maximize investment potential. It cannot be used as a way to save money, although if you already have a fair amount of savings, it could help you take the next step.
Conclusion
Budgeting techniques, such as the 70/30 rule, are a means to an end. They can help improve your personal finances, but will not do so without the aid of realistic goals and expectations.
FAQs
What is the 70/30 rule in investing?
In investing, the 70/30 rule acts as a sure-fire way of not risking more than you comfortably can and should when investing. It also gives you a stable foundation which is mandatory for investors.
Additionally, when specifically adapted toward investing, it can also serve as a specific investment method, known as the Warren Buffet 70/30 rule.
Is the 70/30 rule worth doing?
The 70/30 rule is worth trying. As with all budgeting techniques, the 70/30 rule should fit your needs. If you believe you could make it work, it is worth trying. If you think a variation might be better, try with the version you prefer.
What is the 70/30 rule in finance?
In finance, the 70/30 rule ensures that you will spend, save, and invest safely. 70% of your income is considered “spending money,” which you will usually spend on necessities and monthly expenses, while 30% is allocated to savings or investments.
So, what is the first step? The first step is setting realistic goals based on income and deciding on which version of the 70/30 rule is best for you. The only thing left after that is sticking to the rule.
