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Budgeting

Jun 20, 2024

What is the 75/15/10 rule?

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Navigating personal finances can often feel like attempting to solve a complex puzzle without any clear guidelines. Enter the 75/15/10 rule, a simple framework that provides structure for your financial planning and helps you divvy up your income for both immediate needs and your long-term financial goals. The 75/15/10 rule suggests devoting 75% of your income to living expenses, 15% to investing, and 10% to savings. This guideline can be a flexible way to prioritize your long-term financial future when deciding how to budget and allocate your income, which you can adapt based on your situation. Let’s explore how it works, when you might want to use it, and how you can put it into practice. 

Here’s what we’ll cover:

How the 75/15/10 rule works

When you build a budget, you’re making a plan for how you’ll spend your money each month. By using the 75/15/10 rule, you start the process by dividing up your income into three buckets:

  • 75% of your money is for your living expenses. That includes must-have needs, like rent/mortgage payments and bills, as well as wants like entertainment and other discretionary spending. 
  • 15% of your income is devoted to investing, such as a retirement fund or brokerage account. This money is invested in securities like stocks, bonds, and exchange-traded funds (EFTs) with the aim of growing it over the long term.
  • 10% of your earnings go into savings, ideally in an interest-bearing account, to set aside money for short-term goals or an emergency fund to cover large, unexpected expenses. 

Because the 75/15/10 rule is based on percentages, not hard dollar amounts, you can apply it no matter how much money you make. The lion’s share of your income covers the day-to-day cost of living, while the rest goes toward funding your future financial goals

When to use the 75/15/10 rule 

While anyone can build a budget using the 75/15/10 rule, there are a few considerations that can affect how well-suited it is for different financial situations. 

Future-focused financial planning

If you add together the 15% for investing and 10% for saving, it comes out to 25% of your income going toward your future instead of being spent now. That could work well if you’re focused on longer-term goals like saving for a house or building up a retirement fund. 

That said, implementing the 75/15/10 rule requires that you can cover all your living expenses with 75% of your income. That might not be realistic for everyone. But that doesn’t mean you can’t embrace the spirit of this guideline by devoting whatever portion of your income you can afford to investing and saving for your future. The idea is to prioritize putting your money into accounts where it will earn interest and returns, setting you up for a better financial situation down the road.

Emphasis on long-term investing

Within the 25% of your income that goes toward future goals, the 75/15/10 rule puts a bit more emphasis on investing. There are important differences between saving and investing: the former is geared toward shorter-term financial goals you want to achieve within five years, while the latter focuses on a much longer timeline. Saving money in a bank account tends to have lower returns, but keeps your money liquid and is usually very low-risk. Investing, on the other hand, trades off less liquidity and more risk for potentially higher returns over the long haul. 

Devoting 15% of your income to investments puts more emphasis on long-term goals, like retirement or saving for a child’s education. If you have a lot of shorter-term goals, such as buying a house, replacing your car, or paying for a wedding, you may prefer to put a slightly larger percentage of your income toward savings for the time being.   

The 75/15/10 rule and debt repayment

If you have high-interest debt, you’ll need to consider how that fits in with the 75/15/10 rule. Credit card balances and personal loans often come with high interest rates, and carrying those balances can pinch your monthly budget. Plus, mounting interest on your debts might actually cost more over time than returns you earn on investments and savings. People with high-interest debt might want to create a plan to get out of debt, especially paying off credit card debt, before budgeting based on the 75/15/10 rule.

On the other hand, if you’re not carrying any high-interest debt, you might find that the 75/15/10 rule is a useful guideline for putting your money to work for you. For instance, once you pay off all your credit cards, you could devote the money you’d been spending on those payments to investing and saving; instead of paying interest to someone else, you’ll be earning interest and returns.       

Implementing the 75/15/10 rule in practical terms

The 75/15/10 rule is flexible; you don’t necessarily have to adhere to the percentages exactly. To put it into practice, you’ll need to understand your financial picture, including income, expenses, and debt. Then you’ll want to create a budget and start your journey into investing and saving. 

A step-by-step guide to using the 75/15/10 rule

Step 1: Understand your income and expenses

Tally up your monthly income and expenses, including both wants and needs. When you compare the two numbers, can you cover all your living expenses with 75% of your income? If not, you might look for ways to save money so you can devote more of your income to investing and saving.

Step 2: Tackle “bad debt”

Some debts, like mortgages and student loans, are considered “good debt” because they contribute to your big-picture financial health by increasing your assets or earning potential. These debts also tend to have lower interest rates and fixed terms. But “bad debts” like credit card balances can get in the way of using the 75/15/10 rule effectively. Consider using the debt snowball method or the debt avalanche method to knock out those high-interest debts as soon as possible.

Step 3: Take stock of your emergency fund

An emergency fund is a financial safety net to be used in case of a crisis, like losing your job or encountering a large unexpected expense. By having plenty of money you can rely on in such cases, you can avoid going into debt or taking money out of your savings and investments. Determine how much emergency funds you should have based on your income and expenses. If you need to build it up, dedicate the 10% savings suggested by the 75/15/10 rule to that goal before saving for other short-term goals. 

Step 4: Create a budget with the 75/15/10 rule

With the 75/15/10 guideline in mind, build a monthly budget. Break down your living expenses into categories and allocate 75% of your income to cover them. Then include line items for putting 15% of your money into investments and 10% into savings. You might want to try the envelope method or a zero-based budget to plan and track your spending.  You could even consider a budgeting app.

Step 5: Start investing your money

Now that you’ve got a plan to invest 15% of your income, learn how to start investing your money. There are many types of investment accounts to choose from, including:

Generally speaking, the investing aspect of the 75/15/10 rule is about building wealth over time, so you may want to focus on long-term investments. And remember, you don’t have to choose just one type of investment account; many people have more than one to grow money for various financial goals.

Step 5: Decide where to store your savings

While you want easy access to your savings, especially your emergency fund, you’ll get the most benefit from the 75/15/10 rule if the money you save earns interest instead of sitting idle. Consider FDIC-insured bank accounts that earn more interest than a standard savings account.

  • High-yield savings accounts offer higher interest rates, but be aware that they may come with higher minimum balances and could charge fees. 
  • Money market accounts are like a hybrid between a checking account and a savings account; you’ll usually find higher interest rates along with check-writing privileges, making it even easier to access your money. 
  • Certificates of deposit (CDs) provide fixed, higher interest rates in exchange for keeping your money locked away for a set term, so they can be a good option if you won’t need the money until the CD matures.

Step 6: Adjust, commit, and review

The idea behind the 75/15/10 rule is to follow a guideline that prioritizes growing your wealth over time. You can make adjustments now and in the future to reflect your financial situation and changing financial picture. 

  • Adjust as needed: Because the 75/15/10 rule is a simple, percentage-based formula, you can easily adapt it to your circumstances. If you can’t make ends meet on 75% of your income now, tweak the percentages so that you can cover your expenses while still putting some portion of your earnings into savings and investment vehicles. If your employer matches a certain percentage of your 401(k) contributions, consider investing at least enough of your salary to get the full match. 
  • Commit to your plan: Putting money toward your future can take discipline, so make a commitment to your investing and savings strategy so that you don’t wind up spending money you’d planned to earmark for the future. You might want to have your employer deposit a portion of your paycheck directly into your savings account and set up automatic transfers from your bank account into your investment accounts. 
  • Review your financial plan annually: Your financial outlook will inevitably change over time. As you move through your career and encounter life milestones, your income and expenses will shift. Review your 75/15/10 plan each year and tweak things accordingly. For instance, you might increase the percentage you’re saving if you’re planning to have kids in the next couple years, or you may want to invest a larger percentage of your income as you near retirement. 

Is the 75/15/10 rule right for you?

The 75/15/10 rule can help you prioritize the saving and investing habits that help you grow your money over the long term. As long as you can take care of your living expenses with 75% of your income, using this guideline can help you use the remaining 25% to work toward a brighter financial future. By remaining flexible, you can adjust the formula to reflect your current circumstances and modify it over time as your needs fluctuate. Ultimately, the 75/15/10 rule gives you a guideline that can help you feel more in control and empowered to work toward your financial future. 

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Written by

Tara Blaine

Tara Blaine draws on over 20 years of experience as a writer to translate seemingly complex financial ideas into insights readers can put to work in their everyday lives. She’s written personal finance education materials for numerous institutions, helping customers learn smart techniques for budgeting, overcoming debt, saving money, and planning for their long-term financial health.

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