by Layla Vanderslice

What Is the 70-20-10 Rule or 10-20-70 Rule?

The 10-20-70 Rule from George Clason’s book, The Richest Man in Babylon, creates a stable foundation and balance in our finances. Without balance we can easily be thrown off track.

 When my son got his first bike, we spent countless hours trying to teach him to ride, but he still couldn’t get the hang of it. My mother was finally the one who successfully taught him the fine art of riding his new bike. 

Fast forward eight years to our daughter’s first bike. Her bike was different than our son’s. She started with a balance bike that didn’t have pedals. It sat low to the ground and was powered by pushing off with her feet and balancing as she rode down the sidewalk. 

Once she learned to balance, she was then ready for a “real” bike with pedals and all. From her first ride she was balancing and just had to learn to pedal before taking off on the trails. The difference between these riding experiences for each of our children was significant. Our daughter learned much faster than our son because she learned to balance the bike first.

To establish financial balance with the 10-20-70 Rule, your income is divided into three distinct categories representing your Past, Present and Future. 

Future:

Your future represents the first 10% of your income and is money you will keep. When you realize the value that you offer to your family and others it’s not difficult to see that you should be worth at least 10% of your income.

Past:

The debt category represents your past. Consumer debt will include your credit cards, medical bills, miscellaneous loans and things outside your normal living expenses. Your mortgage, auto loans and financial aid are not included here because we all need a place to live, transportation and education. However there are some exceptions such as a second home or luxury cars.

It’s important to keep your consumer debt payments below 20% of your income. If we are cutting our living expenses too low just to get out of debt, it’s like cutting calories on a fad diet. Eventually we will feel like we’re starving and gain that weight (debt) back again.

Once your consumer debt is paid off, your opportunity to build wealth grows exponentially. The 20% you’ve been paying towards debt can now be added to the money you’re keeping for your future.

Present:

The final 70% of your income is for your living expenses and represents the present. This will include charitable giving along with your mortgage, utilities, food, clothing, auto loans, financial aid and all other basic needs. 

With a solid foundation and the balance of the 10-20-70 Rule, you can truly experience financial freedom.

When I was in college and newly married, I was determined to live debt free. However I never learned to keep any of the money I earned. I was only taught to save for things I wanted to buy. I saved for my car, college and a home, but never for my future. Learning to keep 10% for my future would have made a dramatic difference later in life.

Attempting to live debt free didn’t last long. With financial aid debt compounding, a new home and new business, there wasn’t anything extra to put towards our future. We were young, so keeping a portion of our income didn’t seem necessary. After all, we thought that we’d have the money we needed as our income increased. 

We began to use our equity line of credit and credit cards to offset low collections in our business, and before long we were barely managing our debt as the 2008 economic crisis hit. Because we didn’t have balance in our finances or a stable foundation, we quickly got off track, and time had now gotten away from us.

We were first introduced to the 10-20-70 Rule in our mid-forties, with overwhelming debt and very little savings. As we began to change our lifestyle and implement these financial principles, we began to experience balance and stability for our future. It’s never too late to start. Just like riding a bike downhill, you’ll have more momentum if you start at the top rather than halfway down. If I had been taught the 10-20-70 Rule in school, we may not have experienced the economic hardships we’ve faced throughout the years and balancing our finances would have been easier.

How to Get Started

The great news is that you don’t have to be out of debt to start establishing your future.

But before you can move forward you first have to know where you are on the financial hill. You’ll begin with your after-tax income because we have no control over taxes, and we want to maximize the money you bring home each month. 

If your income or bills fluctuate each month, use an average dollar amount for simplicity. Start by calculating 10%, 20% and 70% of your after-tax income for the year and divide by 12 months.

Under the amounts you’ve just calculated, list the average monthly amount of each bill or payment that’s specific to that category. Total your actual expenses and compare this amount to the 10-20-70% already figured. If your actual numbers match the 10-20-70 amounts, great job, you’re right on track! If your numbers don’t match, that’s when you make changes.

First look at how much you’re spending towards debt. Are you making the minimum payment, or paying extra each month? If you’re paying extra, those payments can be reduced to just the minimum for now. Review your living expenses looking for areas where expenses can be reduced. 

When I first started applying the 10-20-70 Rule, I discovered our debt was within 20%, but our living expenses were too high, and we weren’t keeping 10% of our income.

Over time I’ve been able to reduce our living expenses and increase the money we keep. I recently saved $1000 on our annual homeowner’s insurance premium just by shopping around.

A simple way to stay on track and keep your finances organized is by setting up automatic deposits or transfers to separate accounts. This can be done through your employer or through online banking. If you’re not keeping 10%, start now. 

Maintaining financial balance with the 10-20-70 Rule, you’ll have the money you need for your past, present and future.

Life Benefits Commentary:

Layla is not alone in wishing that she would have learned about the 10-20-70 Rule, also known as the 70-20-10 Rule, in school. There’s another Rule you may have heard of called the 50-20-30 Rule. From what we have seen, the 50-20-30 Rule does not yield the right balance that Layla talks about being so important. The 50-20-30 Rule is more like the financial fad diet Layla talks about in this article. It works short term.

When people use the 70-20-10 Rule, they have good financial balance and long-term financial stability. It’s a reliable way to figure out how much of your paycheck you should save. As you read in the article, when someone has no debt, the 70-20-10 Rule can become a 70-30 Rule where you live on 70% and save up to 30%! 

We encourage you to use Layla’s workflow to figure out your 70-20-10 amounts and put the 70-20-10 Rule to work right away. When people use the 70-20-10 Rule, they keep more of the money they make, and they have financial peace of mind. 

Layla, thank you for sharing this tried and true Rule. It would be great if this was taught in school!

What Do you Wish You Had Learned In School?