When it comes to budgeting our costs, we’ve all heard of the 50/30/20 rule. After savings and loans, it is one of the most common strategies to handle fixed and variable costs. It’s also the simplest formula to remember: 50% for fixed costs, 20% for savings and loans, and 30% for discretionary spending. This method strikes the ideal balance between obligations and relaxation. But what about when it comes to debt repayment? The 20/10 rule is your best bet!
The Rule of 20/10
This method is straightforward. Debt payments should account for no more than 20% of your annual net income and no more than 10% of your monthly net income. The rule is simplified into two equations, one for the entire year and one for each month. That covers credit card debt, vehicle loan debt, and even college loan debt. This guideline assists in managing the overall maximum amount you should be paying toward your debt, ensuring that you are neither overpaying nor underpaying your bills. You may find yourself paying far more than you know toward your debt, which may be the source of your financial stress. This rule can help you get rid of that concern!
The benefits and disadvantage
There are advantages and disadvantages to this strategy, as with most in financial management.
The benefits: This same rule helps to restrict your borrowing quantity and is a very basic debt management guideline.
The disadvantage is that if you are currently paying a mortgage, it will not be the most practical guideline to follow. Mortgage or property payments are not included in this calculation. This strategy will be tough to utilize if you have student loan debt, but don’t worry! It is not impossible. Nevertheless, be aware that it is more restrictive. When employing the 20/10 strategy, it is best not to incur any new debt (don’t swipe that credit card!) while still paying off your student loans.
p data-changed=”false” data-paragraphid=”7″>You may figure it out on your own or use our 20/10 budget calculator to get your precise maximum debt payment.