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The 20/10 Rule for Budgeting and Debt Management

The 20/10 rule for budgeting and debt management can identify excessive consumer debt and guide your future spending decisions.
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20/10 rule for budgeting and debt

As a financial planner, I see many military families’ spending habits up close. One thing that stands out: families and individuals whose debt takes up 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 tell 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 major spending categories:

  1. 20% of your income goes into savings
  2. 10% of your income goes toward debt repayments, excluding mortgages
  3. The remaining 70% of your income goes toward all your other living expenses. 

That’s why it’s sometimes called the 70-20-10 rule or the 10-20 rule. 

Define your spending thresholds and keep control of your finances.

Read More About the 50/30/20 Budget Rule

The Purpose of the 20/10 Rule

With any budget guideline, always “pay yourself first.” That means you should avoid overspending on consumer debt and have a big-picture plan for where your money’s going. 

Unlike the 50/30/20 rule, the 70% towards spending isn’t split into needs versus wants. So, evaluating your monthly budget under both rules may 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’re putting in savings equals 20% 

Then, make sure you’re only putting 10% towards consumer debt, such as: 

  • Credit card debt
  • Student loans
  • Vehicle 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 consumer debt. 

If your spending analysis shows that your consumer debts exceed 10% here, you may have too much debt relative to your income. If so, consider prioritizing debt payments to get under 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 house, car payment, education milestone or emergency fund now can help you avoid accruing excessive debt in the future. 

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20/10 Rule Example for Military Members

From our prior 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 goals. 

Tech Sgt. Michael Smith is 29 years old, has 10 years of service and lives with his dependents at Robins Air Force Base in Georgia. 

  • Basic Pay: $3,987
  • Housing Allowance (BAH):  $1,428
  • Subsistence Allowance:  $407

Assuming a 12% federal income tax withholding plus FICA (social security and medicare) and 0% state income tax, he’d make about $5,045 per month after tax. 

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

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

Using this threshold, Smith can figure out how much he needs in the bank before he visits the car dealership. 

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

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

Planning a Vehicle Purchase?

Find Out How Much Vehicle You Can Afford

Pros and Cons of the 20/10 Rule

Whether you’re planning for a car loan or creating a debt payoff plan, the 20/10 rule’s ability to guide your debt decisions ahead of time is its most significant advantage. 

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 for you to manage your finances. 

However, every financial guideline comes with some drawbacks. 

If you’re repaying prior student loans, car loans or credit card debt, you may be unable to limit your debt spending to 10%. 

Repaying 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 allocation toward a faster debt payoff.

Otherwise, use the 10% maximum threshold as a standard to work towards and get your debts below this level. Focus on paying off the highest debt first or even consolidate debt to lower interest rates to speed up your progress.

What Is the Best Budget Rule for Military Members?

Remember, the best budgeting rule for military members is the one that works for you – and the one you’ll stick with! 

That might be the 20/10 rule or the 50/30/20 rule. Each budgeting guideline has different strengths and weaknesses.

The biggest key here is consistency. Try one and see if it works. If not, try another and just keep at it every month. You may also find it helpful to work with one of DOD’s free personal financial counselors available at no cost to military members. Here’s a list to help you find one near you.


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About Daniel Kopp

Daniel Kopp, CFP ®, is a fee-only, fiduciary financial planner and founder of Wise Stewardship Financial Planning, which helps military service members, widows and widowers organize their financial lives by aligning their money with their deeply-held values. Kopp is also an Air Force veteran with nearly nine years of service.

Daniel became a widower after his wife, Sarah, passed away in late 2017 while he was on active duty. Daniel is now remarried and lives with his wife, Anna, in the Sarasota, Florida area where they love to explore new places and learn new things, try interesting cuisines, and serve in their local church.

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