Getting a handle on your personal finances may take more than just clipping coupons and starting an emergency fund. It may mean changing your spending habits and implementing savings tips to make sure you are on track to achieving your financial goals. Many Americans are living paycheck to paycheck, but with a few tweaks to your budget, you could stop being one.
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The 75/15/10 rule is one strategy you can try, regardless of whether you’re taking your first steps into budgeting or looking to tighten your financial grip. It’s a simple yet powerful approach, and even money experts like Jaspreet Singh say it’s a formula for helping people become millionaires. Here’s how it can transform your approach to money management.
Quick Take: The 75/15/10 Budgeting Rule
The 75/15/10 rule is a simple way to budget and allocate your paycheck. This is when you divert 75% of your income to needs such as everyday expenses, 15% to long-term investing and 10% for short-term savings. It’s all about creating a balanced and practical plan for your money.
This is a great system to try if you are facing growing expenses and need a readjustment. However, as with any financial plan, there are pros and cons to consider:
Pros
- It’s easy to track and keep you from overspending.
- If your expenses have grown, it allows for more spending than other budgeting plans.
- If you are new to stricter savings regimes, this is a great way to allocate your funds to either long-term or short-term goals.
Cons
- You don’t save much for short-term needs, especially compared to other plans where financial advisors say to put away at least 20% of your paycheck each month.
- If you have a large amount of debt, this method won’t help you pay it down quickly.
- Depending on your financial situation, these percentages may be unrealistic given that many people would struggle to allocate 25% of their paycheck to either investing or saving.
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How the 75/15/10 Rule Fits Into Your Life
The 75/15/10 rule is fairly flexible, meaning it can work for lots of different financial situations. If your income goes up and down a lot, or if you live in a city where everyday items cost more, you can adjust the rule to fit your needs.
If you often have months where you earn more, you might want to save or invest a bit extra during those times. This way, you have a cushion for when money is tighter.
On the other hand, if you’re in an area where rent and living costs take up a big chunk of your budget, you might need to tweak the percentages a bit. The main idea is to use the 75/15/10 rule as a starting point and then change it up as needed to match your own financial picture. Here’s the general breakdown, though.
75% to Daily Living
This major portion of your income goes towards your daily living costs. From rent and groceries to your Netflix subscription, this 75% is designated for all your regular expenses.
15% Invested for Future Growth
This segment is your future-focused fund. By putting 15% of your income into investments like stocks or real estate, you’re not just saving — you’re growing your wealth.
10% Saved for Emergencies
The final 10% of your income should be your safety net. This is your emergency fund, meant for unexpected expenses. The ultimate aim is to build a reserve that can cover around six months of living expenses, giving you peace of mind and financial security in case of something unforeseen.
The 75/15/10 Rule: A Step-by-Step Guide to Getting Started
- Know your income and expenses. Start by getting a clear picture of your monthly take-home pay and where it’s currently going.
- Adjust your spending. Look at your current expenses and see if they align with the 75% guideline. If not, identify areas where you can cut back.
- Explore investment options. If you’re new to investing, start small and educate yourself on different investment types that not only fit your risk profile, but also your interests.
- Build an emergency fund. Aim to gradually save up to six months’ worth of living expenses, starting with whatever amount you can afford regularly.
- Be flexible with changes. As your life circumstances change, be ready to modify your budget to keep up with your needs.
Final Take To GO: Build Your Better Budget
The 75/15/10 rule is more than a budgeting method — it’s a way to make sure you are spending, saving and investing your money wisely. This plan is flexible, so you can adjust it to fit your own money situation. However, while this budgeting rule offers a straightforward framework for managing finances, it’s not without its pitfalls.
One major challenge is its lack of feasibility for those with variable incomes or living in high-cost areas, where the designated percentages may not realistically cover expenses or allow for adequate savings and investments. Additionally, this rule might oversimplify financial planning if you have more complex issues to tackle, such as a large amount of debt.
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This article originally appeared on GOBankingRates.com: What Is the 75/15/10 Rule? A Simple Path to Better Budgeting
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