Saving can be difficult and as a result, there are lots of different methods and techniques for budgeting to try and help everyone find a way to save money that suits them.
This way, more and more people can save up for important things like vacations, new family members, and deposits for cars and new houses.
One popular rule often advised for people to try is the 70/30 rule – but exactly is it?
Here we are going to be taking a look at the 70/30 rule including what it is, how it works, and how you can use it to save yourself more of your income. So, let’s dive right in!
What Is The 70/30 Rule?
The 70/30 rule is a budgeting technique used by people to save money while covering their living expenses (for a different savings rule, check out our guide to the 30-Day Savings rule).
This rule is also sometimes known as the Warren Buffett formula or the Warren Buffett rule, named after the American business investor who first suggested the rule.
Buffett was well known for giving financial advice and ‘rules’ to help American families budget their income and make the most of their savings.
While no one is sure when Buffett first advised the rule, it has become one that is now synonymous with his legacy.
So, how does the 70/30 rule work?
To follow the 70/30 rule, you have to save at least 30% of your monthly income.
The other 70% is to be spent on your monthly living expenses such as rent or mortgage payments, bills, food, clothes, toiletries, tax, gas, etc. If you have anything left of that 70% by the end of the month, then great!
But following this rule will guarantee that you will be saving at least 30% of your income every month – that’s just under a third of your paycheck.
The goal is that over time, that 30% of your monthly paycheck will quickly accumulate until you reach your desired amount. However, you are not just dumping that one third of your income into a savings account and leaving it to gather cobwebs.
No – this 30% is further broken down to help you get more out of your savings.
What To Do With That 30%
Storing your savings in a savings account is a great way to basically earn free money on the interest, but Buffett had another idea in mind when he first explained the 70/30 rule. In reality, the 70/30 rule isn’t really a straight 70 to 30 split of your income – instead it’s a 70 to 20 to 10 split.
While the 70% of your income is spent, the remaining 30% is further divided into another 20% (that’s a fifth of your income) and 10%. So, what happens to these chunks of your money?
Where The 20% Goes
First, the 20% should be spent on your savings. Sometimes, you will have debts to pay off (such as student loans) and so Buffett recommended that you should try and spend an additional fifth of your income on these debts to clear them as quickly as possible.
If you don’t have any debts to pay off, then this 20% of your income can go into a savings account to earn the interest.
Where The 10% Goes
The final 10% is the important part of your savings that goes into a range of different options. Technically, you will be ‘spending’ this amount but in different ways.
Buffett recommended using this 10% to go into investments so you can potentially earn a profit and thus, earn more money from your savings rather than just leaving it in a savings account.
However, investing can be risky which is why a larger chunk of savings should go into a savings account. This way, you are only gambling with a small amount of your money.
You could also spend this 10% by putting it into a retirement account, helping you to set yourself up for a better future.
No matter how far away you are from retirement, it’s still a great idea to get a head start so try and spend 10% of your income into an early retirement savings account.
However, Buffett was also a philanthropist which means that he also believed in paying money back into your community.
While your taxes will help cover most things, you can also choose to spend that 10% of your income by giving it to charities to help those less fortunate than yourself.
Which charity you choose is down to you but this is the path Buffett recommends for those who are already in pretty secure financial situations.
So, if you have no rent to pay and your mortgage is paid off, or if you already have a fair amount of money in your retirement account, then giving back to society and your community is a highly recommended way to spend that last 10% of your income.
The Alternate 50/30/20 Rule
This alternative version of the 70/30 is one often followed by those who have lower expenses. After all, not everyone has to pay for a mortgage just yet or has a car to pay for.
This is particularly the case for those young people who are still saving up for their first house deposit – so this rule is better adapted for those in those situations.
The 50/30/20 rule is better split to account for these lower expenses. The idea is to spend half of your monthly income on your expenses, save a third, and spend a fifth on retirement or investments.
However, if you really want that house deposit sooner and you’re not interested in investing, then just put the full half of your income towards that instead.
Final Thoughts
Ultimately, the 70/30 rule isn’t for everybody but it’s a great place to start if you are struggling with budgeting or not sure what to do with your savings (for an alternative budget rule, check out our guide to the 50/20/30 rule).
This budgeting technique gives you a guide on how much you should spend, save and invest every month – so why not give it a try and see how much more you will save. Good luck!