Dubai—Managing personal finances can be challenging, especially when expenses consume most of your income. One increasingly popular method to streamline budgeting is the 70-20-10 rule, a straightforward approach to dividing your income into three key categories: living expenses, savings, and debt repayment.
Understanding the 70-20-10 Rule
The 70-20-10 rule allocates your income into three distinct buckets:
- 70% for Living Expenses: This covers essential needs such as housing, utilities, transportation, and healthcare.
- 20% for Savings: This portion is designated for saving and investing, including building an emergency fund and planning for retirement.
- 10% for Debt Repayment: This segment is used to pay down any debts beyond the minimum required payments.
Financial planners highlight that while variations like the 80-20 rule exist, the 70-20-10 rule remains widely adopted due to its balance and simplicity.
Applying the 70-20-10 Rule
To apply this rule, start by determining your total monthly income. For example, if your income is Dh10,000, allocate Dh7,000 for living expenses, Dh2,000 for savings, and Dh1,000 for debt repayment.
Breaking Down the Categories
- 70% for ‘Needs’: This category includes non-negotiable expenses like rent, car payments, groceries, and minimum debt payments. Dubai-based wealth advisor Mohammad Shaan advises that more than half of your income should cover these essentials. If you’re spending more, consider reducing discretionary spending or downsizing your lifestyle.
- 20% for ‘Wants’: This includes discretionary spending on items like dining out, vacations, and entertainment. Abu Dhabi-based financial planner Andrea Barber suggests that this category covers non-essential luxuries and lifestyle upgrades. If needed, you can adjust this spending based on your financial situation.
- 10% for Debt Repayment: This includes extra payments towards reducing debt beyond the minimum required. Shaan notes that while minimum debt payments are part of the 70% allocated for needs, additional payments should come from the 10% reserved for debt repayment.
When the 70-20-10 Rule Might Need Adjustment
The rule may need to be adjusted based on individual financial situations. For those with high living costs or significant debt, sticking precisely to these percentages might be challenging. In such cases, treat the 70-20-10 rule as a financial goal, aiming to balance spending, saving, and debt repayment as much as possible.
Conclusion
The 70-20-10 rule provides a structured approach to budgeting, helping manage living expenses, savings, and debt repayment effectively. Financial experts recommend using this rule as a flexible framework to tailor your budget according to your specific needs and financial goals.
