How Do You Calculate 70/30 Rule? – Basic Finance Literacy

Do you want to manage your money most efficiently, and how do you calculate 70/30 Rule? A helpful way to manage your money is by using the 70/30 Rule. This budgeting strategy is easy to follow and helps you split your income into two main parts: one for your daily needs and the other for your financial goals. The rule encourages you to live on 70% of your income, using it for things like food, rent, bills, and other essentials. The last 30% is set aside for important financial goals, such as saving, investing, or paying off debt. 

Here, we’ll explain the 70/30 Rule’s calculation, why it’s useful, and how to use it to manage your finances. Let’s break it down in an easy-to-understand way that’s practical for everyone. 

Why is the 70/30 Rule Important?

By following this rule, you make sure that most of your money goes toward covering your everyday needs, but you also save and invest for the future. The 70/30 Rule in life is the best way to help you manage your money each month. It suggests dividing your income into two parts:

70% for Living Expenses: This part covers everything you need to live day-to-day. It includes things like rent, groceries, electricity, transportation, and even some fun activities like going to the movies or eating out. 

30% for Financial Goals: This part is for your future. It is money you save, invest, or use to pay off debts, which means putting money into a savings account or investing in something. Over time, it grows or pays down any loans or credit card balances. 

If you use the 70/30, you can avoid spending all your money and be better prepared for big purchases, emergencies, or future goals. It is a simple way to stay in control of your finances.

The 70/30 Rule aims to keep your lifestyle spending under control while making sure that you are continually working toward your financial goals. You can live comfortably today while also preparing for long-term financial security by keeping to these proportions. 

Step-by-Step: How to Calculate the 70/30 Rule

Let’s go over an easy way to determine the 70/30 Rule for your budget.

Step 1: Determine Your Monthly Income

The first step is to determine your net monthly income. It is your take-home pay after taxes, insurance, and other deductions.

Example: Assume you make $3,000 each month after taxes. It is the amount you will need to apply the 70/30 rule. 

Step 2: Calculate 70% for Living expenses:

Next, calculate 70% of your monthly income for living expenditures. These expenses include necessities like shelter, food, transportation, and infrastructure, as well as extra costs like eating out or entertainment. 

Formula:

Example:

Using our 3,000 income example:

It implies that your monthly living expenditures should not exceed $2,100.

Step 3: Calculate 30% for Financial Goals:

Calculate now 30% of your income to allocate toward your financial goals. Its portion is dedicated to savings, investments, and debt repayment. 

Formula

Example:

Using our $3,000 income example:

It means $900 per month for investments, saving, or paying off debt.

Breaking Down the 70% for Living Costs

The 70% provided for living costs can be divided into other kinds of spending. Here’s how you might break it down:

• Housing (30-35%): This includes rent or loan payments, property charges, and house insurance.
• Facilities (5-15%): It includes groceries and household supplies.
• Transportation (10-15%): Public transportation, gas, car payment, and insurance.
• Optional spending (5-10%): Eating out, entertainment, shopping, and personal care.

Example Breakdown:

If you are living on $2,100 a month for expenses, you might divide it like this:

• Housing: $900 as 30%
• Utilities: $150 as 5%
• Groceries: $300 as 10%
• Transportation: $300 as 10%
• Optional Spending: $450 as 15%

This breakdown will differ depending on your circumstances, geography, and lifestyle. Adjust the percentages as needed to reflect your real expenditures. 

Breaking Down 30% for Financial Goals

The 30% set aside for financial goals can be divided into three major areas:

• Savings: Emergency cash or savings for major purchases such as trips or a new automobile.
• Investments: Long-term financial growth through the stock market, retirement accounts, and other investments.
• Debt Repayment: Paying off student loans, credit card debt, or personal loans faster. 

Example Breakdown

Using $900 from our example income, you might divide the 30% like this:

• Savings: $300
• Investments: $300
• Debt Repayment: $300

It ensures you are growing your wealth while paying off debt. 

Why the 70/30 Rule Works

The 70/30 Rule is successful because it creates a balance between your present living expenses and your long-term financial goals. Let’s look at why this strategy is successful for so many people:

1. It is Simple and Easy to Follow

Unlike complex budgets, the 70/30 Rule only needs simple math and two types of spending. You do not have to track every coin, which makes budgeting easier for those who find it difficult.

2. Encourages Healthy Financial Habits

The 70/30 Rule promotes savings, investing, and debt repayment, all of which are essential for accumulating wealth and financial security. This way, you are not living paycheck to paycheck without considering the future. 

3. Provides Flexibility

Within the 70% category, you have the freedom to direct your money toward the things that are most important to you. If you enjoy traveling, you can adapt your discretionary expenditure to accommodate getaways. You have complete control over your spending as long as you keep within the 70% limit.

4. Improves Long-term Planning

The 30% commitment to financial goals ensures that you are always improving your financial future, whether it is by planning for an emergency, investing for retirement, or paying off debt. Over time, this component expands your financial safety net and generates greater prospects for financial independence. 

The 70/30 Rule vs. Other Budgeting Methods

There are various other common budgeting approaches, so how does the 70/30 Rule compare?

1. 50-30-20 Rule

It splits the money you make into three categories:

• 50% for needs
• 30% for wants
• 20% for savings/investments

Compared to the 70/30 Rule, the 50-30-20 Rule allocates more toward savings and investing but needs stricter control over living expenses. 

2. Zero-Based Budgeting

With zero-based budgeting, every dollar of your income is set aside for a specific purpose, which means you “spend” every dollar in your budget. This strategy necessitates careful tracking and is best suited for those who want complete control over all aspects of their finances. 

3. Envelope System

The envelope method includes physically or digitally reserving funds for specified spending categories. When you run out of cash in an envelope, you can no longer spend in that category. This strategy can help you reduce your spending, but it is more restricted than the 70/30 Rule. 

Read More: What is the 70/30 Rule in Investing?

Conclusion

The 70/30 Rule is a flexible, simple budgeting method that promotes both responsible spending and long-term financial planning. The article “How do you calculate the 70/30 rule?” explains manage personal finances. You may ensure a comfortable lifestyle while developing a solid financial future by dividing your income into 70% for living expenditures and 30% for financial goals. 

Whether you are new to budgeting or searching for a simpler way to calculate the 70/30 rule, it provides a good balance of current and future financial goals. Try it and see how it can help you attain financial stability and success!

FAQs: How Do You Calculate 70/30 Rule?

What is the 70/30 Rule in Personal Finance?

The 70/30 Rule in personal finance suggests that you allocate 70% of your income for living expenses and discretionary spending, while 30% should go toward saving and investing. 

Can I Adjust the 70/30 Rule?

Yes, the 70/30 rule can be adjusted based on your financial situation. If your living expenses are lower, you might increase your savings percentage to 40% or more. Similarly, if you have higher expenses, you can start with a smaller savings percentage and gradually increase it. 

Is the 70/30 Rule Suitable for Everyone?

The 70/30 rule is a good starting point for most people, but it may not suit everyone. People with different income levels or financial goals may need to modify the percentages to better fit their unique situation.