How To Build Wealth Using The 10-20-70 Money Saving Strategy Rule
Have you heard of the “10-20-70 Money Saving Strategy Rule”?
I bet you have heard of this subject in almost all of the financial articles, forums and blogs available on the internet.
Or maybe you have heard it from someone who does it regularly like your friends, neighbors or from some rich guy in your neighborhood, or from a respected financial guru who preaches about financial freedom.
This strategy has many names but the concept is similar. If you do know about this money-saving strategy and you do it regularly with conviction, then you don’t need to read this post and I congratulate you and wish you more abundance in the coming years.
But if you haven’t heard of this want to know why you struggle from paycheck to paycheck wondering where did all your money go with little or no savings left, Then read on.
What Is The 10-20-70 Money Saving Strategy Rule
The rule is very simple and easy to understand:
[alert-note]10% of your monthly income should be set aside to your leisure expenses.[/alert-note]
[alert-note]20% of your monthly income should go to your investment vehicles.[/alert-note]
[alert-note]70% of your monthly income should be spent on your living expenses.[/alert-note]
Let’s further discuss what the rule is all about.
#1 You Should Only Spend 10% Of Your Monthly Income To Your Leisure Expenses
Let’s say you wanna watch a movie, or a concert perhaps? or buy that shiny necklace you’ve been eyeing for 6 months, or treat your loved ones to a fancy restaurant, you should only spend 10% of your monthly income on this.
Whatever happens, you should not exceed this limit.
#2 20% Of Your Monthly Income Should Go To Your Investment Vehicles
This is where you practice the “pay yourself first” habit. Once you get your monthly salary, immediately set aside the 20% and invest it in your portfolio.
Instead of paying your bills first, you pay yourself first. After you pay yourself, you live off with what’s left to your money rather than the other way around.
By making this a habit, you turn a part of your monthly cash flow into income generating assets month every month.
This habit is why rich people stay rich. Rich people have investments that had accumulated and grew big overtime which gives them monthly cash flow exceeding beyond their living expenses.
Sad to say, poor people don’t practice this kind of habit.
#3 The Remaining 70% Of Your Monthly Income Should Be Spent On Your Living Expenses
But before anything else, one important thing to do before you spend this money is to set aside a certain percentage of this for a retirement fund and an emergency fund.
A Retirement Fund is a fund you save for your retirement. Once money comes in this account, it never goes out.
An Emergency Fund on the other hand is a fund that you build and spend when an emergency goes by.
Let’s say you need money after a typhoon? or payment for your hospital bills after an accident or illness? or your car broke down and needed repairs? When an emergency goes by and you need money to spend, you get it here.
Now, after setting aside your retirement and emergency funds, It’s time to set aside money for your fixed and variable expenses.
Fixed Expenses are monthly expenses that by definition, are fixed. Utility bills, loans, insurance payments, credit card bills and mortgages are examples of these type of expenses.
On the other hand, Variable Expenses are expenses that vary. Food, household expenses, transportation, cellphone load, gasoline and many other expenses that varies as the day passes by goes to this category.
Does all of this stuff sounds difficult? Not really. But the truth is, this particular part of the strategy is where most people fail because their lifestyles exceed their 70% income threshold.
That is why before investing, you should make it a priority to settle all your debts first and learn to live within your means.
How To Have A Mindset Of Saving
Let’s say you have a monthly net income of PHP 20,000.00 with all taxes and government issued benefits already deducted, you are single and you live with your parents.
Once you receive your monthly salary, here’s what you can do:
- Immediately set aside 20% or PHP 4,000.00 and invest it in the stock market.
- Set aside 10% or PHP 2,000.00 budget for your leisure expenses for the month.
One important thing to consider before thinking of investing in stocks is that you should first pay off all your large debts.
If your job is your only source of income, I believe that debt settlement should be your first priority.
If you have other sources of income (business, passive income), then you can simply adjust how much you should invest and how much money you’ll pay for your debts. The key thing in here is money management.
From the remaining 70% or PHP 14,000.00, here’s what you can do:
- Set aside 5% or PHP 700.00 for your emergency fund.
- Set aside 5% or PHP 700.00 for your retirement fund.
- Set aside PHP 5,000.00 to pay for your utility bills.
- Set aside PHP 1,000.00 to pay for transportation expenses.
- Set aside PHP 600.00 to pay for cellphone load. Subscribe to unlimited text/call promos to minimize high call and text messaging charges.
- Spend the remaining PHP 6,000.00 on other variable expenses (food, personal grooming, etc.). Save whatever is left and add it to your emergency fund.
Take note that this example is only applicable for a single person with no dependents. Your saving plan will really depend on your lifestyle. I advise to adjust accordingly.
I believe that a proper money management formula like the 10-20-70 rule when applied, will totally change your financial life.
This rule requires a RICH mindset. It would be difficult to save and invest if you’re not open to a radical change of mindset on how to think about money.
If you can apply a money management formula like this one consistently in long periods of time, your wealth would increase without sacrificing your leisure life and you’ll never have to worry about money when you retire.
It would be best to adapt this mindset as early as possible preferably if you’re still young. Time is the ultimate ally here.