The 10/20 Rule for Budgeting and Debt Management


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

The 20/10 rule for budgeting and debt management can help you determine if you have too much debt and guide your future spending decisions.

What is the 10/20 rule?

I recently wrote about the 50/30/20 spending rule – well, the 20/10 rule is a similar helpful guideline.

Like the 50/30/20 plan, the 20/10 rule breaks down your after-tax income into three broad expense categories:

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

This is why it is sometimes called the 70-20-10 rule or the 10-20 rule.

Learn more about the 50/30/20 budget rule

The purpose of the 20/10 rule

Whatever the budget directive, always “pay yourself first”. This means avoiding overspending on consumer debt and having an overall plan for where your money is going.

Unlike the 50/30/20 rule, the 70% for expenses is not divided between needs and wants. So evaluating your monthly budget according to both rules can be a good idea to see what each might reveal about your situation.

How to use the 20/10 rule

The 20/10 rule has a simple starting point.

Take your after-tax income and multiply it by 20% and 10%, respectively. Make sure the amount you save is equal to 20%

Next, make sure you only spend 10% on consumer debt, for example:

  • Credit card debt
  • Student loans
  • Car loans
  • Personal loans
  • Medical debts

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 expense analysis shows that your consumer debt is over 10% here, you may have too much debt relative to your income. If so, consider prioritizing debt repayments to get below the 10% threshold to avoid financial stress and strain.

If you have no consumer debt, consider saving that 10% for other financial goals or purchases. Saving for your next home, car payment, college milestone, or emergency fund now can help you avoid excessive debt in the future.

Sample 20/10 rule for the military

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

Technical Sergeant. Michael Smith is 29 years old, 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
  • Living allowance: $407

Assuming 12% federal income tax withholding plus FICA (Social Security and Medicare) and 0% state income tax, he would earn about $5,045 a month after tax.

Smith is already saving $1,009 each month to meet the 20% savings guideline. He puts about half of that into his Thrift Savings Plan (TSP) and saves the rest for a down payment on his next vehicle and his children’s education.

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

Using this threshold, Smith can determine how much he needs in the bank before he goes to the car dealership.

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

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

Are you planning to buy a vehicle?

Find out how much you can afford

Advantages and disadvantages of the 20/10 rule

Whether you’re planning a car loan or creating a debt repayment plan, the 20/10 Rule’s ability to guide your debt decisions in advance is its most important benefit.

The more consumer debt you have, the harder it is to meet your other financial goals. Debt planning before a major financial purchase can reduce stress and make it easier to manage your finances.

However, every financial guideline comes with some downsides.

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, like overdue 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% maximum threshold as the standard to work on and get your debts below that level. Focus on paying off the highest debt first or even debt consolidation to lower interest rates to speed up your progress.

What is the best budget rule for the military?

Remember, the best budgeting rule for the military is the one that works for you – and the one you stick to!

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

The biggest key here is consistency. Try one and see if it works. If not, try another and continue monthly. You may also find it helpful to work with one of the DOD’s free personal financial advisors, available free to military members. Here is a list to help you find one near you.


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