The 70% Rule: How to Afford Spending, Saving, and Investing on ANY Income!

The "70% rule", how much to budget for spending, saving, and investing...SO DARN SIMPLE! From FunCheapOrFree.com

When I work with families or individuals, an overwhelming issue Freebs want help with is figuring out, based on their income, how much money to spend vs save, and how to be able to afford vacations and FUN while still paying bills and being financially responsible.

Well, the time has come to give you all my secret sauce.

I’m going to share one of my simplest (but most effective) secrets with you.

I’m a bit nervous about it, for I feel once I do no one will need me any more (waah!). But I love you, so I’m going to share it anyway… but if you want more information on my budgeting secrets, and secret sauce, checkout my new budgeting program, Budget Bootcamp!

This financial principle not only works, but it will work FOREVER. With a little adjusting, this will help you throughout your life to know exactly how much to spend, save, and invest…no matter you income, debt, where you live, or stage of life. 

When Bubba and I finally saved up enough and had a stable enough income to move into our home, we were on cloud nine…until Bubba had to take a 40% pay cut a few months after closing. Wah waaaahp. The good news is that this principle helped us stay on track. No derailing, no panicking, no living off of credit cards. We knew exactly what to do. Though we had to work hard, it didn’t ruin us like our F.D (Financial Disaster) nearly did.

Sounds pretty dreamy, right?

(Well, as dreamy as any kind of budgeting system can be, anyway…) Let’s get to it. I now introduce to you…

THE 70% RULE

Duhn duhn duuuuuuhn!

It’s simple, really. Here’s how it works:

The "70% rule", how much to budget for spending, saving, and investing...SO DARN SIMPLE! From FunCheapOrFree.com

THE NUTSHELL:

You take your monthly take-home income and divide it by 70%, 20%, and 10%. You divvy up the percentages as so:

  • 70% is for monthly expenses (anything you spend money on)
  • 20% goes into savings, unless you have pressing debt (see below for definition) in which case it goes toward debt first.
  • 10% goes to donation/tithing, or investments, retirement, saving for college.

Piece of cake. Piece of crumb cake. (Name that movie!)

WHY IT WORKS:

The beauty of percentages vs hard-nosed numbers is that percentages fluctuate easily; your budgets will always grow or decrease with you! You’ll never be lost or confused. If you make $1000, $10,000, or $1,000,000…you can always easily find 70% (with help of a calculator, if you refuse to do mental math like I do).

Another beauty with this method is that everything is covered! You HAVE money set aside for savings/debt…for spending…for investing, retirement, or charity…you’re covered! So you don’t need to feel guilty when going on vacation, or no need to stress worrying about how you’ll ever get your dang credit card paid off. Gotcha covered, chap.

UPDATED NOTE:

NOTE: You MUST make this work for you! I’ve had lots of comments and questions about wanting to give 10% tithe AND put money toward retirement. If you can afford it, YAY! GO FOR IT! This is a general guideline. For us, until recently we wouldn’t possibly have been able to live off of less than 70% because we made so little. As we got out of debt and my husband got better paychecks, we are now in abundance mode…so we take from the 70% and use some of that to go toward investing, retirement, and college for our kids, all while preserving the 20% savings and 10% tithing.

OK! Now on to…

THE MEAT AND POTATOES (trust me, you want to read this part):

The "70% rule", how much to budget for spending, saving, and investing...SO DARN SIMPLE! From FunCheapOrFree.com

Here’s the thorough breakdown of all the components of my financial principle:

“INCOME”:

When I say “income”, that doesn’t mean the income listed on your tax statements. When I say “monthly take-home income” I mean literal IN-come…the amount of actual dollars that actually hit your bank account each month. Yes, that means after taxes, insurance, withholdings, etc. From here on out if its not deposited into your checking account, it’s not considered “monthly take-home income” in Jordan-dom. Kapish? 

Tips for making this work:

  • Find your monthly average. If you’re paid monthly or bi-monthly, total how much hits your account (average at least 3 months) and put a solid monthly number to it: not weekly.
  • Random paychecks. If you have a tip-based, commissioned, or service-based income, you need to find an average so you aren’t having to re-calulate budgets every month of your life. Read “How to budget on a tip-based or varying income” to see what to do about that.

70% FOR EXPENSES:

The "70% rule", how much to budget for spending, saving, and investing...SO DARN SIMPLE! From FunCheapOrFree.com

Expenses include EVERYTHING you spend money on, including (but not limited to): bills, utilities, emergency or unexpected expenses, shopping, food, you name it. If you spend money on it, it’s considered an expense. Here’s how you do this:

  • Let’s pretend your monthly take-home income is $3,000/month, for easy math’s sake. Remember, this is the total amount that actually gets deposited into YOUR bank account each month!
  • Find 70% of that take-home income.
    • 70% of $3,000 is $2,100 (3,000 x .7 = $2,100).
  • So everything you spend money on in a month needs to total $2,100 or less (in this example, anyway). That includes mortgage + bills + fun spending + insurance + utilities + eating out + groceries…everything.

Tips for making this work:

  • 70% or less is the real key. If you don’t NEED to live off of 70%, then by all means, don’t! The less you spend, the more you can save and invest = the better life your family will have. 70% is the maximum.
  • First, you need to find out what you’re CURRENTLY spending. Pull up every dime you’ve spent for the last 3 months (you read that right) and put it on a spreadsheet. EVERY DIME…even if it’s $.50. Every dime or this won’t work!
  • Categorize the spending on the spreadsheet so you know at a glance what you’re spending money on (groceries…eating out…clothing…decor…bills…school fees, etc)
  • Find the total of all spending (for all 3 months) and divide by 3, so you find a realistic average. 
  • Don’t have credit card or bank statements because you pay cash for everything? That means you don’t have accurate record of all spending, so you’ll need to start tracking EVERY DIME you spend for the next 3 months. You really should do it electronically. Don’t like credit cards? Use a debit card, it’s basically like cash. Just to make sure you’re tracking everything, and know what categories your spending is going to! I really really really recommend using a debit card. Once you have a handle on it you can go back to cash.
  • Now that you have your average…is it over your 70% guideline? Start cutting back. Make a duplicate copy of your spreadsheet (so you don’t mess up the original!!). Start deleting unnecessary, “want” (not “need”) expenses that you could cut out monthly: eating out, shopping, late fees, etc. Keep deleting until you’re within that $2,100 (going off of our example).
  • No matter what you do, can’t get it to fit within 70%? Get real with yourself and make it happen. Sell your car. Move to a cheaper house. Cut your cable. Get a better paying job. Sorry to break it to you guys, if you’re spending too much, you’re spending too much! I’m tough love here because Bubba and I did sell our car. We did cut cable. We stopped eating out entirely. I stopped getting my hair cut professionally. We did it! We first focused on cutting back to get our debt and spending in order, and build up savings. Over time our focus has shifted to making more money (thanks to Bubba working his tail off) so after paying off debt and working hard, we now have started sneaking those luxuries back in our life. It’s like losing weight. You might need to live off of lettuce and water to drop 100lb, but eventually you can start eating cookies again…in moderation, of course.

“PRESSING DEBT”:

The "70% rule", how much to budget for spending, saving, and investing...SO DARN SIMPLE! From FunCheapOrFree.com

Dave Ramsey won’t like this, but I don’t necessarily believe that everyone should make paying off their house an absolute priority. Why? Because for Bubba and I it wasn’t even close to an option for the first 8 years of our marriage (hint, we’ve been married 8 years). I think you can be very smart; pay extra toward principle, refinance to get a better interest rate, buy a home that allows you to keep all spending 70% or less of your income…but do we need to sink every dime we have into paying off a house? Not in my book.

When I say “pressing debt” I mean the urgent, expensive debt that is hurting your credit and costing you LOADS of interest each month: namely credit cards and loans. You need to be your own judge if pressing debt is a car loan in your house. Cars are weird for us because they are a business expense, so I’m not going to answer that one for you. Just make sure that any car payments fit easily in your 70% range if you get or have a car loan.

20% TO SAVINGS:

Keeping with our $3,000 example, 20% would be $600/month. Yes, 20% might seem high…but yes, savings is that important!

Tips for making this work:

  • 20% (at least). If you can spare more, sure, do more! ESPECIALLY if you are paying off debt…put as much as you can spare toward it so you can be free and move on to bigger and better things.
  • If your current financial situation can’t support setting a solid 20% aside each month, that’s ok! Do your best to get on your feet financially, put away as much as you can, then add more % as you can spare it as time goes on.
  • Have it automatically draft into those bank accounts each month so you never have to think about it! Not sure how to do that? Call your bank, they can set it up in a snap.
  • If any fees are involved with auto drafting, get a better bank! We bank at Chase, but there are lots of great ones out there.
  • DON’T SKIMP ON THIS NO MATTER HOW TEMPTING IT IS! The beauty of having 1/2 go to Family Savings is that that is where the “fun” stuff you never seem to have money for (…Disneyland…a boat…new couches…a car…) comes from. The beauty of having 1/2 go to Emergency Savings is that it will protect your family when the inevitable hits! We will all need our savings at one point or another. 10% is nothing to protect your precious family. Again, see “The 7 Bank Accounts Your Family Should Have” for more.

10% for DONATING or INVESTING:

The "70% rule", how to afford spending, saving, and investing...SO DARN SIMPLE! From FunCheapOrFree.com

Since the day I turned 8 years old, 10% of anything I earned has gone to my church. Not because my church is destitute or money-hungry, but because I firmly believe (and have seen it again and again and again in my own life) that karma is REAL. God is GENEROUS, and 10% is little compared to what he gives. Not to mention you get back 10x what you give in life, and I’m living proof of that. BUT…I understand not everyone feels the same way.

Here’s what to do with that 10% (which, as per our example, would be $300/mo):

  • Donate. Find a cause you feel passionate about! If everyone gave a mere 10% of their bounty to others, our world would change forever. Find a way to give back, and commit to a solid 10%.

Alternatively, that 10% could be used for a number of things including:

  • Invest. If donating isn’t your gig, here’s the opportunity to invest! This would be in addition to a 401K or anything else that’s taken from your paycheck.
  • College. Here’s how to afford your kids’ college and/or weddings! Chip away at it by putting money away each month.

Remember, as mentioned above, you don’t have to limit yourself to 10%! Just be sure to set aside AT LEAST 10%, no matter your income. For us, we wouldn’t have been able to afford a drop over 10% for years, but now we can. So we take money out of our 70% for retirement and investing, as we can afford it. And remember, this is of your TAKE HOME income. If you have money coming from your paycheck into a 401K or other retirement account straight from your paycheck, then keep that in mind as you decide how much more to pull from your 70%.

SUMMARY:

In conclusion…

(does anyone else feel like they are in an 8th grade Social Studies class?)

This principle is SIMPLE and LIFE-CHANGING for 3 simple reasons:

  1. Percentages, rather than numbers, make budgeting easy as life naturally fluctuates.
  2. By following the 70% rule you have all your bases covered, and can magically afford everything you’ve been wanting/needing to afford.
  3. Um…I don’t know. I just like things that come in 3’s.

I promise this works.

The end!

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If you’re new here, welcome! You can get all my budgeting and finance tips, and my secret sauce in my fun-to-watch video program Budget Boot Camp! You have nothing to lose because if you don’t save or earn at LEAST what you paid for it, I’ll give your money back. So use the code FCFBLOG at checkout to get an extra 10% off, and give it a try!

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Comments

  1. Great post! Question: would things like investing for retirement go in the 70%, or is retirement counted in the non-take-home pay (and thus separate from the numbers you talked about)?

    Also, you mentioned Dave Ramsey “won’t like” what you are saying because you don’t want to attack the house debt. I know you haven’t looked into him too much so that you keep your ideas separate, but he actually recommends keeping the house part of your debt separate and paying it off in baby step 6 (rather than baby step 2 where all other debts get paid off). Just thought I’d help ease your mind 😉

    • YAY! Thanks for letting me know about Dave R., glad to know we have many of the same ideals! As for investing and retirement, go read the “10%” section, it explains that. If you tithe or donate 10% then and you also want to set money aside for retirement and investing (which I recommend), then yes, it would come out of your 70%. If you have retirement money coming from your paycheck already, then be sure to consider that when reevaluating your percentages. Thanks for reading! XO

  2. OK, so not to get into a doctrinal debate, but my tithing comes out to be more like 13% than 10% because we pay tithing on what we make before taxes, insurance, retirement, etc. Also would fast offering be part of this or the 70% expenses? Thanks.

    • Lol, I thought the same thing about my tithe when I wrote out our percentages. I personally let it come out of the 70%. I think the general principal is the most important thing.

    • Mine is the same way, so it made my numbers all weird. I would just add percentages to the tithing part and take away from the expenses, but I guess that just defeats the whole thing.

    • To each his own! We were taught to pay 10% of all increase and otherwise it’s up to each individual family, so there’s no problem in doing it however you see fit! As for Fast Offering, yes, that comes out of our 70%. Thanks for reading! XO

  3. I love this! After adding up all of our bills they equal less then 70% of our income, but I didn’t account for our weekly $20 allowance each or eating out/gas. OUCH! We will be sitting down and reevaluating these things for the month of August because I would love to build up more of a savings account rather then eating out twice per week.

    As always, thanks for your great tips and advice.
    Sara
    Sara recently posted…Ronin HughesMy Profile

    • I’m so happy for you that you are less than 70%, I can’t tell you how FANTASTIC that is!! Most people don’t realize that they are in the upper 90%, so 70’s or less is killer! I’m proud of you, let me know how the re-evaluating goes! XO

  4. I really like this method! Quick question on pressing debt (with a lengthy scenario for you):

    I have student loan debt that I would consider a pressing debt because the interest rate is really high, and the total loan amount is bigger than my mortgage + car (we made some poor financial choices as 18 year olds!). In this case, how do you handle? Obviously it’s a monthly expense that I am required by the lender to pay every month, so does this come out of the 70%, or is it considered Pressing Debt and comes out of the 20%? The monthly payment is actually larger than what 20% of my monthly income would be… can something like this cross over into two categories so we know how to budget for it?

    • I was wondering about student loan debt too. My husband and I each have loans from grad school which are on income-based repayment. We’ve been paying it as a monthly bill…should it actually be considered pressing debt?

      • I would consider it pressing debt. However, my brother in law is a doctor. His schooling took over a decade and wracked up over $200K, so that’s not so easily paid off in just a few months. However my husband and I considered student loans pressing debt, so that’s my opinion. But just figure out what it means for you!

    • Hmm…that’s a tough one. And I’ll be the first to admit that I’m NO financial planner! Without knowing your financial situation (aside from what you told me) I would say YES it’s pressing debt. Do everything you can to attack it and get it GONE! Think of how much freed up money you will have once it’s paid off, not to mention how good it will feel to be free of it. We sold our car and refinanced our house in order to get out of our debt, so while it may sound drastic, it was only for 1 year then we got back on our feet! Put 20, 30, 40% toward it if you can! Just whatever you can spare. But make it a top priority. It’s costing you so much money and probably stress, do what you can to get rid of it. The harder you hit it, the faster its gone and the sooner you can go back to usual spending and saving! I’m not sure what your savings is like but if you have at least $1000 in savings, I would put all 20% from your “savings” category into the debt. That’s just me though, you need to decide what’s best for your family and don’t be afraid to talk to a professional about it for further advice! XO

  5. Hi Jordan,
    I was so happy to read the post and it comes just in time! Thank you as it all makes total sense.
    What I was sad to read was why you tithe. Tithing shouldn’t be about Karma and “give, just so we can get more”; it’s a gift from God. I think it amazingly gracious of Him to say about HIS money “look, you keep 90% and just give me 10%”. That’s a GIFT!! Obviously He doesn’t need the money; it’s His anyway, but He’s testing our faith and seeing if we’re trusting Him fully, yes even in our finances. Many trust Him wholeheartedly, except not in their finances.
    I suspect you kept that part “generic” as to not cause a spiritual storm and I pray you tithe because you are SO STINKIN THANKFUL For how He’s blessed you and your family.
    I hope this doesn’t offend.
    Grace and peace.

    • Glad we’re on the same page! As you can imaging, having to summarize why I tithe in just 2 or 3 sentences is next to impossible. Plus I didn’t want to sound preachy. But just know that you and I are 100% on the same page, and WHY we really tithe goes much deeper than Karma. Thanks for reading!! XO

      • its simply called paying it forward and it does come back to you, test me on this, or test him on this. I am someone that squeaks when it comes to money, but the chance came up to test the word and I found it to be true give, and you receive to give again and be more helpful.

  6. What do you do to tithe 10% AND invest and save for college? For example, do you invest with one of your 10% savings accounts? Is a portion of your family savings account dedicated to saving for college? Thx!

    • For us, this is new because finances have been so tight for so long, all we could really spare was the 70/20/10 formula. But now that we are in abundance mode, we take from the 70% and put it toward investing, retirement, and college. Just take the general percentage idea and make it work for you! Hope that helps!

  7. I like the formula concept, but I am having a hard time with a few areas in it. Everyone should be saving 15% towards retirement (IRA’s, 401k’s, etc…) so you’re saying that you can only give towards retirement if you choose not to tithe your 10% b/c that is all that is allocated there…. I think it should be more like 60% expenses, 10% tithe/donating, 15% Retirement, 15% Savings (including college and future expenses). Debt should be paid first! Sorry, big dave ramsey follower here.

    • Perfect! No, I think that’s great! I was just showing the bare-bones formula system, I think it’s important for everyone to adapt to make it fit. When we were in our financial crisis, there was no way we could live off of just 60% because we made so little income. As we shift into Abundance Mode, we can spare more. So I think that formula of yours looks great! Thanks for sharing 🙂

  8. I know my husband and I MUST start this plan because we desperately need to get control over our debt and spending. I just started reading this blog and I am IN LOVE. Cannot wait to start putting all these tips to use. So, with the 20% towards Savings – I know we will have to put at least half of that towards debts. Then do I further split the remaining 10% between Family Savings and Emergency savings?

    • I’m so glad you like it, thanks for the feedback! If you have “pressing” debt, I would put the whole 20% toward it (especially if it’s credit card debt!) until it’s gone. THEN focus on building up savings. Best of luck!!!

  9. I’m a fan of simple budget principles. You are first that I’ve seen to include tithing as a priority. My one question though is have you considered, for those that do tithe, suggesting that tithe should be from gross income. For me, even though tithe is not a “tax” to God, but rather an expression of our trust and faith in Him, it just seems more appropriate to give Him the first fruit of our labor rather than after the government gets it’s share.

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