If it seems as if you don’t have a strong hold on your finances and you’re struggling to ensure things don’t spiral out of control, then the 20/10 rule is one of the things to take note of. This rule or formula is used to limit how much debt you can comfortably accommodate with your monthly and yearly income.
What is the 20/10 Rule?
The 20/10 rule follows the logic that not more than 20% of your yearly net income should be spent on consumer debt, and no more than 10% of your net monthly income should go towards paying the debt repayments.
While a housing repayment might be considered a “debt”, it doesn’t apply to this rule. This rule focuses more on consumer credit, e.g., payday loans, and credit card debt.
Consumer debt is personal debts that are incurred as a result of purchasing goods that are used for personal or household consumption.
20/10 Rule of Thumb vs. 70/20/10 Rule of Thumb
There is a budgeting rule known as the 70/20/10 rule. While the 20/10 rule only helps with debt management, the 70/20/10 rule sums up 100% of your earnings and helps with other aspects of budgeting.
The 70% goes towards your living expenses, including loan repayments. The 20% is allocated towards savings; you could carve out emergency funds from this percentage. The last 10% goes towards investments, i.e., stocks, bonds, or any desired investment.
The 20/10 rule of thumb helps to manage your debts and the 70/20/10 rule is a guideline used to help manage your entire spending.
These rules exist essentially to help you find ways to categorize your spending and budget effectively.
What is a healthy monthly budget?
A healthy monthly budget is an ideal and well-balanced budget that helps you prioritize your spending so that you have enough money to pay for your needs, wants and savings. An ideal budget is specific to everyone based on priorities, values, and decisions. There are several ways to set up a healthy monthly budget, the most popular being the 50/30/20 rule of budgeting.
Bottom Line
The 20/10 rule helps you determine whether you’re paying too much debt interest and also set a limit on how much more debt you’re ready to take on. This rule helps provide a solid structure for your finances, as well as helps you limit your borrowing and debt. Yet, one of the most significant benefits of this rule is it allows you to keep and save more of your income.
Still unsure of how to properly budget your finances? Tell us about it in the comments.
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This article is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It does not purport to be complete and is not a substitute for seeking the advice of a qualified professional for your individual financial situation.
