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:
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.
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):
Here’s the thorough breakdown of all the components of my financial principle:
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:
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.
- See “The Simplest Budgeting Technique Ever” for easy ways to keep your budget in check each month! It’s soon simple! My “Why a Monthly Budget is So Yesterday (…and What to do Instead)” post is also very helpful.
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.
- I recommend having 10% go into Family Savings, and 10% going to Emergency Savings (for the difference between the two see “The 7 Bank Accounts Your Family Should Have” (my most viral and used financial principle/post).
- 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:
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%.
(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:
- Percentages, rather than numbers, make budgeting easy as life naturally fluctuates.
- By following the 70% rule you have all your bases covered, and can magically afford everything you’ve been wanting/needing to afford.
- Um…I don’t know. I just like things that come in 3’s.
I promise this works.
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!