The 20/10 rule of budgeting and debt management

As a financial planner, I see firsthand the spending habits of many military families. One thing that stands out: Families and individuals whose debts occupy less than 10% of their monthly budget are the least financially stressed among my clients.

The 20/10 rule of budgeting and debt management can help you figure out if you have too much debt and guide future spending decisions.

What is the 10/20 rule?

I recently wrote about 50/30/20 spending rule Well, the 20/10 rule is a similarly helpful guideline.

Like the 50/30/20 plan, the 20/10 rule divides your after-tax income into three main spending categories:

  1. 20% of your income goes to savings
  2. 10% of your income goes to paying off debts, excluding mortgages
  3. The remaining 70% of your income goes to all other living expenses.

That’s why it’s sometimes called the 70-20-10 rule or the 10-20 rule.

Set your spending limits and take control of your money.

Read more about the 50/30/20 budget rule

The purpose of the 10/20 rule

With any budget guidelines, always “pay yourself first.” This means that you should avoid overspending on consumer debt and have a comprehensive plan showing where your money is going.

Unlike the 50/30/20 rule, 70% toward spending is not broken down into needs versus wants. Therefore, it may be a good idea to assess your monthly budget under both rules to see what each might reveal about your situation.

How to use the 10/20 rule

The 10/20 rule has a simple starting point.

Take your after-tax income and multiply it by 20% and 10%, respectively. Make sure the amount you put into savings equals 20%.

Next, make sure you’re only putting 10% into consumer debt, something like:

  • credit card debt
  • Student loans
  • auto loans
  • personal loans
  • Medical debt

Note that Your mortgage is not included here. The 20/10 rule classifies your mortgage as a living expense, not a consumer debt.

If your spending analysis shows that your consumer debt exceeds 10% here, you may have too much debt relative to your income. If that’s the case, consider prioritizing debt payments to get below the 10% threshold to avoid stress and financial stress.

If you don’t have consumer debt, consider saving 10% for financial goals or other purchases. Saving for your next home, car payments, grade school or emergency fund can help you avoid building up excessive debt in the future.

Manage your budget using technology

Our favorite free personal finance app is Personal Capital, which allows you to track your spending, income, expenses, and investments in a free, easy-to-use platform.

Read our full review here.

20/10 sample base for military members

From our previous 50/30/20 article, let’s look at the same example on an Air Force E-6 to see how the 20/10 rule can help you create a long-term financial plan that meets your goals.

Technical Sgt. Michael Smith is 29, has 10 years of service and lives with his dependents at Robins Air Force Base in Georgia.

  • Base salary: $3,987
  • Housing allowance (BAH): $1,428
  • Subsistence allowance: $407

Assuming a federal income tax deduction of 12% plus FICA (Social Security and Medicare) and 0% state income tax, he was earning about $5,045 a month after tax.

Smith is already saving $1,009 per month to hit the 20% savings principle. He puts about half of that into his Savings Plan (TSP) and saves the rest for a down payment on his next car and his kids’ education.

He has no credit card debt or student loans, so the maximum amount of consumer debt Smith can take on under this rule’s 10% limit is $504 per month.

With this limit, Smith can figure out how much he needs in the bank before he visits the car dealership.

Let’s say Smith has his heart set on a brand-new Jeep Grand Cherokee, which starts at about $40,000—give or take taxes and fees.

Assuming a standard loan period of 60 months at an interest rate of 5%, he can borrow up to $26,000 at a maximum of $504 per month. This means he must save at least $14,000 for the down payment or look at a used model.

Planning to buy a car?

Find out how much car you can afford

The pros and cons of the 10/20 rule

Whether you’re planning to take out an auto loan or create a debt repayment plan, the ability of the 20/10 rule to guide your debt decisions ahead of time is its most important advantage.

The more consumer debt you have, the more difficult it will be to achieve your other financial goals. Planning for debt before a major financial purchase can reduce stress and make it easier for you to manage your finances.

However, every financial guide comes with some drawbacks.

If you’re paying off previous student loans, auto loans, or credit card debt, you may not be able to limit your debt spending to 10%.

Paying off high-interest debt — such as delinquent credit card balances — should be your first priority in any financial strategy. You may even need to redirect some of your 20% savings allowance toward faster debt repayment.

Otherwise, use the 10% cap as a benchmark to work towards getting your debt below this level. Focus on paying off the highest debts first or even debt consolidation for lower interest rates to speed up your progress.

What is the best budget base for military members?

Remember, the best budgeting rule for military members is the one that works for you — and one that you’ll stick to!

This could be the 10/20 rule or the 50/30/20 rule. Each guideline has different strengths and weaknesses.

The biggest key here is consistency. Try one and see if it works. If not, try something else and keep doing it every month. You may also find it helpful to work with one of the Department of Defense’s free personal financial advisors that are available free of charge to military members. Here is a list to help you find one near you.

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