Is This Savings System Best for You?

Regardless of your income level, having a budget is key to reaching your financial goals. It helps you keep track of your finances and ensure you’re stashing away enough money for the future.

While there are countless ways to budget, it’s crucial to choose a system that works best for you. The 10-10-80 rule is a great place to start.

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What Is the 10-10-80 Savings System?

The 10-10-80 savings system is a straightforward budgeting method that helps you develop financial discipline so you’re not just living from paycheck to paycheck but actually setting aside money for a rainy day and contributing to causes you care about.

When following the 10-10-80 rule, you take your income and divide it into three parts: 10% goes into your savings, and the other 10% is given away, either as charitable donations or to help others. The remaining 80% is yours to live on, and you can spend it on bills, groceries, Netflix subscriptions, etc.

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How Does the 10-10-80 Savings System Work?

Let’s imagine you’ve just received your monthly paycheck, and it’s a tidy sum of $7,000. Here’s how you would use the 10-10-80 system to better manage your finances:

• 10% for Giving: First, you’d set aside 10% for tithing or giving, that’s $700. Remember, you don’t need to belong to a church or believe in a religion to give a portion of your income away. You also can give back by donating to your favorite charity.

• 10% for Saving or Investing: Next, you’d put 10% into savings, which is another $700. Depending on your financial goals, you can place your savings in various locations. For example, if your goal is to build a hefty nest egg for retirement, consider putting your money away in an Individual Retirement Account (IRA) or a 401(k) plan. But if you’re saving for a short-term goal like a vacation or a car, a high-yield savings account or a short-term certificate of deposit (CD) may be a more appropriate choice

• 80% for Spending: The remaining 80%, which is $5,600 in this case, is what you’d use for your living expenses like rent, groceries, utilities, entertainment, child care, travel, new clothes, etc. This portion of your income can also be allocated toward debt if you have any. If you have multiple existing debts, be sure to prioritize repayment because the longer you wait the more interest payments can add up and make them even harder to tackle.

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By following this system, you’re consistently contributing to your savings, giving back to your community and still keeping your monthly expenses under control.

10-10-80 Savings Rule Pros and Cons

Consider these pros and cons to determine whether the 10-10-80 budgeting method suits your lifestyle and financial goals.

Pros:

• Disciplined Saving: It encourages regular saving and helps build responsible financial habits.

• Simplified Budgeting: The system simplifies budgeting with its straightforward framework for managing money.

• Charitable Contributions: The allocation of 10% for philanthropy not only benefits the community but also helps you learn the value of giving back.

Cons:

• May Not Be Enough for Savings: Saving only 10% of your income might not be enough for long-term financial goals like retirement.

• Charitable Giving Is Not Always Feasible: Not everyone can afford to give 10% of their income to charity, especially those with high debt or low income.

• Lack of Flexibility: This system can be challenging to follow for those with fluctuating income.

Would the 10-10-80 Rule Work for the Average American?

“The 10-10-80 rule can be a solid guideline, but it may not fit everyone, especially considering the financial strain many Americans experience,” said Jeff Rose, CFP and founder of Good Financial Cents.

According to the Federal Reserve’s Report on the Economic Well-Being of U.S. Households in 2022, about 63% of American adults are not able to cover an unexpected $400 expense.

So, while this budgeting rule can work for some people, living on 80% of your income while allocating 10% to savings and 10% to charity might not be feasible if you’re struggling to make ends meet. For example, it wouldn’t make financial sense to allocate 10% to charity when you’re behind on multiple credit card payments and can barely afford rent.

Rose emphasized: “A budget needs to be realistic and consider individual circumstances, debts and financial goals.”

Budget Alternatives To Try Instead

If you don’t think the 10-10-80 rule is the right budgeting method for you, consider these alternatives instead:

• The 50/30/20 Rule: The 50/30/20 savings system involves allocating 50% of income to needs, 30% to wants and 20% to savings and debt repayment. “It provides a balance between living within your means and planning for the future,” Rose said. “It’s also adaptable, so if you have more debt, you can adjust the allocations to pay it down more quickly.”

• Zero-Based Budgeting System: Another alternative that Andrew Latham, CFP and director of content at SuperMoney.com, suggests is the zero-based budgeting system. With this method, every dollar has a specific purpose. “At the start of each month, income minus expenses should equal zero, ensuring that every dollar is allocated, be it to bills, savings or discretionary spending,” Latham said. This allows you to direct every dollar you earn toward one of your expenses and keeps you on track to reaching your financial goals.

• The Cash Envelope Method: Here’s how the cash envelope method works: First, divide your expenses into different categories like groceries, dining out, entertainment, etc. Next, determine a certain amount to spend in each of these categories for the month. Then, take out your envelopes and fill each one with the cash amount you’ve allocated for that category. If you spend all of the cash in one envelope, you can’t dip into another one. This method allows you to see where your money is going and keep yourself accountable.

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This article originally appeared on GOBankingRates.com: The 10-10-80 Rule: Is This Savings System Best for You?