Today I'm sharing a secret that has changed my life and will definitely change yours as it helps you determine WHERE your money should go – it's called the 70% rule!

The 70% rule tells you how much to budget for spending, saving, and investing - get the details from Fun Cheap or Free

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.

*Note: When you click the links in this post, we may receive a commission at no extra cost to you.

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

MY BIGGEST SECRET – THE 70% RULE

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…

The 70% rule is a financial principle that 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 your 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 waaaah. 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.

KNOWING HOW MUCH TO SPEND & SAVE MAKES ALL THE DIFFERENCE

Doesn't that sound dreamy? 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 the 70% rule works:

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

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 PERCENTAGES WORK

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, and no need to stress worrying about how you'll ever get your dang credit card paid off. Gotcha covered, chap.

HOW TO MAKE THIS WORK FOR YOU

With every tip I share, you MUST remember to 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 just 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. I understand that so many of you are in that same situation and it's a huge trial. I've been there.

As we got out of debt and my husband got better paychecks, we were able to move into more of an 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…

LET'S BREAKDOWN THE 70% RULE

We're finally getting to the meat and potatoes! Trust me! You want to read this part… checkout all the components of my financial principle:

MONTHLY TAKE-HOME 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 DETERMINING YOUR INCOME

  • 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% OF INCOME GOES TO EXPENSES

Expenses include EVERYTHING you spend money on, including (but not limited to): bills, utilities, emergency or unexpected expenses, shopping (this includes Amazon), groceries, take out, you name it. If you spend money on it, it's considered an expense.

Th 70% rule helps you know how much to spend - Tips from Fun Cheap or Free

SO HOW MUCH DO YOU HAVE FOR EXPENSES?

  • 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.

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.

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 YOUR SPENDING

On a spreadsheet – so you know at a glance what you're spending money on (groceries, eating out, clothing, decor, bills, school fees, etc). It's best if you can see it!

Don't have a 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.

You want to make sure you're tracking everything and know what categories your spending the most on! I really, really, really recommend using a debit card. Once you have a handle on it you can go back to cash.

FIND YOUR TOTAL EXPENSES

Find the total of all spending (for all 3 months) and divide by 3, so you find a realistic average. 

Now that you have your average, you can make some real decisions about how to move forward. If you are under 70%, you are GOLD! But what if you're over?

START CUTTING BACK EXPENSES

Are you over your 70% guideline? It's okay. Take a deep breath. Now, 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. This could include things like eating out, shopping, late fees, etc. Keep deleting until you're within 70%.

What if no matter what you do, you 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 sooo simple! My “Why a Monthly Budget is So Yesterday (…and What to do Instead)” post is also very helpful.

HOW TO DEAL WITH DEBT

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.

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 to 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% OF INCOME GOES TO SAVINGS OR DEBT

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

Know how much to save with the 70% rule from Fun Cheap or Free

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.

HOW TO MANAGE SAVINGS

I recommend having 10% go into Family Savings and 10% going to Emergency Savings. I explain the difference between the two in my 7 Bank Accounts Your Family Should Have 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 half 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 half 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 my 7 Bank Accounts Your Family Should Have” for more details on these different savings accounts.

DONATE OR INVEST YOUR LAST 10% OF INCOME

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 10 times 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.

SAVE FOR 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 more than 10% for years, but now we can. So we take money out of our 70% for retirement and investing, as we can afford it. 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%.

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.
Want my secret on how to afford spending, saving and investing on any income? Check out the 70% rule from Fun Cheap or Free

I promise this works.

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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!

Make sure that you check out these other posts that will help you out!

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