What is the 70/20/10 Rule of Budgeting?
The 70/20/10 rule is a budgeting tool which can help you create a budget strategy. The 70% is for necessities like groceries, rent, and utilities. 20% is for savings and 10% goes towards fun.
The reason behind the 70/20/10 rule is that people tend to overestimate what they need to spend on necessities while underestimating how much they will spend on fun activities or savings.
This rule can be applied to your everyday life by figuring out how much money you spend every day on groceries, rent, gas etc., then making sure that you save at least 20% of this amount in order to have an emergency fund or indulge in some retail therapy when needed!
How Does the 70/20/10 Rule of Budgeting Work?
The 70/20/10 rule of budgeting helps you plan your finances by dividing your income into three categories: Needs, Wants, and Savings.
The rule can be applied to almost any period of time. It is a general guideline that allows you to monitor the level of expenditure for each category and may help you create a budget, save more money or prioritise certain financial decisions.
How to Implement the 70/20/10 Rule of Budgeting in Your Life & Business
The 70/20/10 Rule of Budgeting is based on the idea that budgeting should first take care of your needs (the first 70%), then your savings to ensure future success (the second 20%), and finally your wants (the last 10%).
This article is a guide for implementing the 70/20/10 rule on your personal finance life and your small business management.
#Personal Finance
The rule of 70/20/10 is a budgeting technique that can be used to help people save more money. In simple terms, the rule states that people should spend 70% of their income on necessities, 20% of their income on savings, and 10% of their income on wants.
#Business Management
In most cases, companies have three different types of budgets: fixed costs, variable costs, and one-time costs. Fixed cost refers to the recurring expenses that do not vary with sales volume; variable costs refer to expenses which vary with sales volume; one-time cost refers to expenses which only take place once in a while.
Implementing the 70/20/10 rule of budgeting is a good way to free up some of your company’s funds.
In order to make a successful budget, it is important to know what your fixed costs are, what your variable costs are, and what your one-time costs are. You can use the 70/20/10 rule of budgeting in order to better understand these three types of cost categories.
Let us look at a Practical Example
Salary of R 12 000 Gross:
| Salary | R 12 000 | |
| Tax | R 700 | |
| Medical Aid | R 1 100 | |
| UIF | R 177 | |
| Pension or Provident fund | R 876 | |
| Take Home Income | R 9 147 |
Applying the 70/20/10 rule:
| 9 147 X 70% | R 6 403 | This must go towards your Needs and fixed costs |
| 9 147 X 20% | R 1 829 | This must go towards you savings and investments |
| 9 147 X 10% | R 915 | This can be used for wants and lifestyle(Entertainment). |
How to Use The 70-20-10 Rule To Get A Financial Head Start
The 70/20/10 Rule is a great way to get an approximate idea of how much money you need to save for different goals. This rule helps you to prioritise your savings goals, and decide what is the best way for you to get there – will it be through budgeting or through other means? This will help to avoid financial pressure and the feeling of being strapped for money.
Useful Links:
0 Comments