We’ve all heard of the 50/30/20 rule when it comes to budgeting our expenses. It is one of the most popular ways to manage fixed and flexible expenses, after savings and loans. It’s also the easiest rule to remember: 50% toward fixed expenses, 20% toward savings and loans and then 30% toward flexible spending. This technique creates the perfect balance between responsibilities and leisure. But, what about when it comes to paying off your debt? The 20/10 rule is the way to go!
The 20/10 Rule
This technique is simple. Your debt payments should only take up 20% of your annual net income and only 10% of your monthly net income. The rule is boiled down to two equations, one for the year and one for every month. So, this includes credit card, auto and even student loan debt. This rule helps manage the total maximum amount you should be paying toward your debt, making sure you’re not exceeding or underpaying your debts. You can find yourself paying way more than you realize toward your debt, and it can be why you feel a financial strain. This rule can help rid you of that worry!
Pros and Cons
Like most techniques in financial management, there are pros and cons.
The pros: The rule helps to limit your borrowing amount, and it’s a super simple guideline for your debt management.
The cons: Unfortunately, if you currently pay a mortgage, it won’t be the most practical rule to follow. Mortgage or house payments are not part of this equation. If you have student loan debt, it will be difficult to use this technique, but don’t fret! It’s not impossible, just be mindful that it is more restrictive. The rule of thumb is not to take on any additional debt (don’t swipe that credit card!) while also paying off your student loans when using the 20/10 technique.
You can calculate the amount yourself OR you can use this 20/10 budget calculator to find your exact maximum debt payment.