How does the 10-20-30-40 rule work and how can it help you?

The 10-20-30-40 rule may sound like a mysterious code from a spy film, but it is actually a simple and effective system that can help you with your finances. It is one of the tools that help you keep your wallet under control and achieve financial stability. Read on to find out exactly what the rule involves, how to apply it in your everyday life and what advantages or disadvantages it brings for your financial health and well-being.

What is the 10-20-30-40 rule?

You can use the 10-20-30-40 rule as a simple key to financial stability. So why try it and apply it? Do you think you have it all in your head? The thing is, we often fall prey to bias and fail to stick to this split. The aim of the rule is to divide your monthly income into four categories:

10%: short-term reserve, or a “rainy-day piggy bank” (unplanned expenses, car repairs; this money can also sit in a savings account)

20%: long-term reserve (investing in shares or funds, investing in property, bonds, cryptocurrencies, fixed-term deposits, money in a savings account)

30%: housing costs (rent, mortgage, energy, water and fees)

40%: everyday living costs (food, clothing, transport, entertainment)

What are the advantages of the rule?

• The rule helps you keep a balance between income and expenses.
• You build up a reserve for unexpected situations.
• It is easy to put into practice.
• You will not spend money unnecessarily.
• Planning and discipline will save you a lot of worry.

What are its disadvantages?

• The percentage split may not suit everyone. If you are single, your aim should perhaps be to save a little more.
• You need to stick to the split.
• It does not take specific needs into account, such as the amount of debt.

How to put the 10-20-30-40 rule into practice

Before you start on the individual steps of introducing the rule, it is important to adapt it to your individual situation and needs. Keep this in mind when setting it up. And now to the individual steps.

1. Work out the amount for each category

• Short-term reserve (10%): multiply your monthly income by 0.1.
• Long-term reserve and investments (20%): multiply your monthly income by 0.2.
• Housing costs (30%): multiply your monthly income by 0.3.
• Everyday expenses (40%): multiply your monthly income by 0.4.

2. Set up automatic transfers

• Open an investment account and a savings account.
• Set up an automatic transfer of 10% of your monthly income to your short-term reserve.
• Set up an automatic transfer of 20% of your monthly income to your long-term reserve and investments.

3. Track your spending

• Record all your expenses for one month.
• Sort them into categories: housing, transport, food, entertainment and so on.
• Identify areas where you can save.

4. Create a budget

• Based on your spending and goals, create a monthly budget.
• The budget should include all the expense categories from step 2.
• Stick to your budget and only make necessary adjustments.

5. Review regularly

• Review how your finances are split on a regular basis (for example, every year).
• Adjust it as needed if your situation has changed (for example, a change of job or the birth of a child).

Not enough money to apply the rule?

Even if you cannot reach all four parts of the rule straight away, you can start gradually. For example, put small amounts into your short-term reserve. Then cut your spending and find an area where you can save.

Think about whether you could create a passive income. The important thing is to start and improve step by step. Be patient and trust that even small steps can lead to big changes.

Start applying the rule now, so you can quickly strengthen your financial stability, which will lead to long-term financial success.

💡Tip: If you need to reduce your household costs, start with overheads.

If you want to use a simple financial rule, 10-20-30-40 is the ideal choice. Dividing your monthly income into 4 categories lets you build reserves, invest, manage everyday expenses and still enjoy life.