What is the key to financial independence? Well, it’s not the amount of money you have. It’s how you spend your money.

The reason? To create and maintain wealth, you must live below your means and avoid debt. It is well known among millionaires that spending less than you earn opens the door to more opportunities. Your money can be invested, saved or donated to a charity of your choice. In a perfect world you could do all three.

And that’s where Jim Rohn’s best financial advice comes in the ring.

The 70/30 rule

For those who are not familiar, Jim Rohn is an australiabusinessblog.com, author and motivational speaker. As a guideline for spending, saving, investing and donating the 70/30 rule can be used.

Why can this be effective? The biggest hurdle for most people is living on 70% of their after-tax income, including all necessities and luxuries. An additional 30% is allocated for investments, savings and charities.

In short, get your spending under control and commit to a budget is necessary if you live on less than you earn. You can’t save, invest, pay off debt, or give to things you care about if you’re living paycheck to paycheck. Again, living paycheck to paycheck isn’t always the result of insufficient income.

In a study by Willis Towers Watson conducted in 2022, 36% of six-figure earners were living paycheck to paycheck, a rate that has doubled since 2019. In addition to record inflation, a lack of a sound money management strategy may also be contributing to the problem.

Money can be easily spent without a plan when you spend without planning and you don’t get paid until the next month’s income arrives. Even better? Eventually this becomes a habit.

According to Thomas Corley, who spent five years studying the daily habits of more than 350 rich and poor people, self-made millionaires make saving a habit. Saving early will help you accumulate more wealth. During their pre-millionaire years, 94% of the self-made millionaires in my study developed the habit of saving 20% ​​of their income.

Thanks to Jim Rohn’s 70% budget rule, you can break away from the paycheck to paycheck cycle. Furthermore, with this advice you can immediately start saving, investing, paying off debt and donating.

Breaking the 70% budget rule

While this rule may seem pretty simple, let’s break it down even further so you can finally build a budget that works for you. However, to further simplify this rule, it has been changed to the 70/20/10 rule.

In this case, your net salary is divided into three bins based on a certain percentage:

• Most of your income, 70%, goes towards monthly bills and daily expenses.
• 20% goes to savings and investments.
• 10% goes towards debt repayment or donation.

The purpose of this ratio is to invest in your long-term financial well-being and your current lifestyle. In addition, the 70/20/10 rule can be adapted to your specific needs financial situation.

Use 70% of your income for monthly expenses

Whichever variant you use, this part is non-negotiable. This means that we spend no more than 70% of our monthly income on living expenses. But what does that actually mean?

There are two types of living costs:

• Basic needs such as food, rent and utilities.
• Discretionary, such as a new pair of shoes, dining out and entertainment.

The 70% rule is a good guideline for having enough money left over for essentials and discretionary expenses so that we can afford everything we need and want in life. You can use the remaining 30% to save more money and pay back debt, whether it’s credit card debt, overdue utility bills, or other personal debts.

The difference between fixed and variable costs.

Budgeting requires understanding monthly expenses and distinguishing between fixed and variable expenses.

Fixed charges.

A fixed expense is an expense that remains the same every month. Some common examples are:

• A mortgage or rent payment
• Utilities — typically variable, but some utilities also offer programs that estimate your average monthly costs so you pay more regularly
• Car payment
• Insurance premiums
• Subscriptions, such as streaming services or magazines
• Membership fees, professional organizations or gyms
• Babysitting — you can add more babysitting nights if needed

Variable cost.

Variable expenses, on the other hand, are expenses that change from month to month, such as:

• Utilities
• Groceries
• Gas
• To go out for dinner
• Entertainment
• trip
• Gifts

When managing a budget, it is important to consider both types of expenses as they can eat up a large portion of the budget. As such, to become a better money manager, you need to be aware of fixed versus variable expenses on a monthly basis.

You must save 20% of your income

Saving is an essential part of everyone’s budget for monthly living expenses and contingencies. Therefore, you plan to save 20% of your total income in the 70% budget. This is an excellent goal, especially since alone 43% of American adults would use their savings to pay for an unexpected emergency expense.

You can consider the following personal financial priorities:

• emergency fund. In case of emergency, you can draw on your emergency fund. This is usually enough to cover living expenses for three to six months. But start with a smaller amount, such as $1,000.
• Falling funds. These are for larger expenses such as car repairs that may occasionally occur.
• Pension savings. Some of the most common retirement accounts are 401(k), 403(b), and 457(b). Roth IRAs and traditional IRAs are also options.
• College savings plans for your kids through 529 plans
• Start-up capital for a company.
• An investment in stocks and bonds
• Investing in real estatesuch as a real estate investment trust or REIT.

Building your emergency fund should be your top priority if you have little to no money in your savings account for emergencies. As you pay bills, variable costs can arise, so saving is also essential.

The good news is that you can save money for multiple savings purposes at once. For example, the thought of retiring seems far away. However, it is best to start early to take advantage of preparations.

Set aside 10% of your income for debt repayment or charitable giving

You will pay off debt or donate (or both) the remaining 10%. It might be a good idea to:

Pay off debts.

If you have debts, you can include them in this 10% category based on your financial situation. However, you are not limited to spending less than 10% of your income on loan payments. As you may recall, student loans and other debts were included in the 70% expense category.

The minimum required payments for your student loans and other debts should be included in your budget. You can also send extra money to speed up the process of getting out of debt if the minimum payments don’t work.

This last 10% can be calculated in any way you like. It may be more beneficial to focus on paying off your debt rather than giving. It is especially important to pay off debts with a high interest rate quickly if they have a high interest rate.

There are two popular options when tackling your debt:

• Debt snowball method. Whatever the interest rate, you start with the smallest debt.
• Debt avalanche method. Alternatively, you can pay off the debt with the highest interest rate first.

You must remember that your minimum debt payments come from your expense category when you use the 70/20/10 budget. To reduce the debt faster, additional payments are required in the 10% extra category.

Share or give.

Giving to something meaningful to you may be part of your final 10% category. You can give regularly to the same organization each month, or you may want to vary your giving, such as:

• Giving or paying tithes to a religious organization.
• Contributions to charities.
• Donate to your university’s alma mater

Frequently Asked Questions

1. What is the 70/30 rule?

According to Jim Rohn, author and motivational speaker, you should live on 70% of your income and save 30%.

The 70% includes all the necessities and desires you may have – housing, utilities, food and clothing. It also includes small pleasures and even luxuries such as a vacation or dining out.

What about the other 30%? He recommends an even distribution between saving, investing and donating.

2. Why use budget percentages?

Instead of allocating a fixed amount to each of your expenses, focus on percentages when creating your budget. The reason? Based on a budget percentage, you can see how your income is spent on a monthly basis. As a result, it is easier to identify areas where spending may need to be adjusted.

Plus, a percentage-based budget ensures that every dollar you earn has a purpose. If you feel like you’re falling short of your financial goals, this is especially important.

3. What should you do if you exceed the 70% budget rule?

Do you exceed the 70% guideline? Do not panic. Start cutting your expenses as soon as possible.

That is of course easier said than done. But for starters, take a good look at your budget. From there, remove unnecessary costs that are “wants” that you could eliminate on a monthly basis. Think of eating out, buying new clothes and subscriptions to streaming services. Continue to delete until you reach 70%.

If you still can’t fit within 70%, what are your options? Be honest with yourself and take action. The solution can be as drastic as selling your vehicle or moving to a less expensive home.

There are other options, such as asking for a raise or changing lanes. If you want to introduce multiple streams of income, consider starting a side business.

4. What are the benefits of the 70% budget?

Budget rules like 70/20/10 offer some great benefits.

The method is quite easy to follow. By dividing your take-home pay into these three categories, you can spend how you want without worrying about derailing your savings or debt repayment plans.

While this budget has some structure, it is not overly restrictive or strict. Every dollar doesn’t have to be spent in exactly the same way.

In addition, this budgeting style puts your financial future first. Building an emergency fund, investing for retirement, paying off debt and giving back to others will also all be part of your daily routine.

5. What are the disadvantages of the 70% budget?

This budgeting method can be difficult to sustain due to the inability to prioritize personal financial needs and wants over unexpected expenses.

People can use credit cards to buy items they can’t afford when they start out on such a budget. Due to interest payments, this can eventually lead to an overload of debts.

Buying a home or financing college tuition may not be possible with the fixed percentage model of a 70/20/10 budget strategy.

Pension goals and emergency funds can also be affected by a limited number of long-term savings.

Relying on this model too much can have unintended consequences. If not carefully monitored, the constant depletion of savings creates a cycle where you cannot save for retirement or necessities of life.

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