The question of today is what is the 10/20 rule of thumb or most commonly known as the 20/10 budgeting rule? This rule helps consumers in good decisions making.
If you have been curious about your finance and how you can make good financial decisions in other to get out of debt then using the 20/10 rule of thumb will be the perfect solution to that.
let’s explain and understand what are the 10/20 rule of thumb, its pros and cons and how to apply them to our everyday life.
What Is the 10/20 Rule of Thumb?
The 10/20 rule of thumb or otherwise known as the 20/10 rule helps in limiting consumer debt payments to no more than 20%. This means that total consumer debt shouldn’t exceed 20% of your annual income and not more than 10% of your monthly take-home income.
Let’s take an example your annual income is $60,000 your total debt shouldn’t exceed $12,000 annually and not more than 10% monthly which means monthly debt shouldn’t exceed $500
More Explanations on the 10/20 rule of thumb
- 10% of monthly income: Describe how much of your monthly income should go toward debt repayment. Your monthly consumer debt payments should equal no more than 10% of your monthly income
- 20% of annual income: This is a portion of your annual income that should be spent on debt. When you take into account all your consumer debt, your debt shouldn’t be more than 20% of your annual income after taxes.
Where Did the 50/30/20 rule come from?
The 50/30/20 rule was first written in a book called “All ultimate Lifetime Money plan”, in 2005 By US Senator Elizabeth Warren and her daughter, Amelia Warren Tyagi.
What Is the 10/20 Rule in Finance
The 10/20 rule in finance explains how much a consumer debt shouldn’t exceed, the rule says your total annual debt shouldn’t exceed 20% and not more than 10% of your take-home monthly income.
What is the 70/20/10 Rule Money?
We can explain this by saying 70% of your total annual income goes to living expenses like buying groceries, paying electrical bills, phone bills etc. While 20% goes towards repaying any debt, or to savings if all your debt is covered. The remaining 10% is money set aside for the things you want after your essentials, debt and savings goals are taken care of.
What’s The Purpose of the 20/10 rule?
The main purpose of the 20/10 rule is to help you manage total annual/monthly debt in other to stay out of debt and create a good financial environment for yourself. This rule helps structure your spending and creates more room for building savings and creating more revenue.
What is the 10/20 rule for credit cards?
The 20/10 rule for credit cards tells you how much you should borrow or spend from your credit card and it is advisable you don’t borrow more than you can pay.
- The 20 refers to Never borrowing more than 20% of your yearly income (not including your housing or mortgage debt).
- The 10 refers to Monthly payments that should not exceed 10% of your monthly net income
20/10 Rule of Thumb vs. 70/20/10 Rule of Thumb
Let’s look at the differences between the 20/10 rule of Thumb vs the 70/20/10 rule of Thumb
|Consumer debt shouldn’t exceed 20% annually||Consumers can spend not more than 70% of their total annual income.|
|Consumer debt shouldn’t exceed 10% monthly||The consumer can spend not more than 20% on repaying debts or loans|
|N/a||The consumer can save 10% of their total income|
How the 70/20/10 Budget rule works
If you want to make your budget based on the 70/20/10 rule. Then it’s important to set aside 70% of your monthly income for expenses, 20% to repay debits for the month and 10% for things you want after your debt is taken care of.
How Does the 10/20 rule Differ from the 30/30/3 rule?
The 30/30/3 rule applies specifically to home mortgages. This rule was developed by Sam Dogen. This budgeting rule gives a detailed overview of how to afford a home mortgage without breaking the bank.
There are three steps to this rule:
- First is that you should only spend a maximum of 30% of your gross income on a monthly mortgage payment.
- Second, the value of your home should not cost more than three times your annual gross income. Let’s say you make $50,000 annually your home shouldn’t exceed $150,000
- The final “3” represents the maximum home price you can afford, which you can do by multiplying your annual gross income by three.
How to Budget your money with the 50/30/20 rule
This rule is basically simple, it tells you how much you should spend on wants and needs which is a great aspect of financial growth. The rule says you should budget 50% of your monthly income on needs, 30% for wants and 20% for savings or paying off debt.
Importance of Savings
Saving money helps navigate tricky situations, meet financial obligations, and build wealth. Saving money is vital. It provides financial security and freedom and secures you in a financial emergency. By saving money, you can avoid debt, which relieves stress and helps in financial growth.
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