What’s popular isn’t always right.
Chances are, if you’ve studied personal finance for any length of time, you’ve come across the 10/10/80 budget allocation method. But is it the best for you?
The 10/10/80 method teaches that people should give 10% of their income, save or invest another 10%, and spend the rest – 80%. It is often advertised as a universally-viable method of handling your finances.
And the thing is, it sounds good, doesn’t it? That means it must be, right?
While the 10/10/80 method correctly splits personal finance into three major categories (giving, saving, and spending), it inappropriately assumes that people should only give 10% of their income. Similarly, it assumes people should only save or invest 10% – as well as that they should start saving up to 10% right away.
10/10/80 Goes Viral
Admittedly, 10/10/80 is easy to remember – amazingly simple! But again, that doesn’t mean it’s the best way to allocate your income.
The 10/10/80 budget allocation method went viral because it is easy to remember, and it holds a nugget of truth: that personal finance can be split into three major categories.
It’s an easy-to-swallow method, but watch out, it’ll make your stomach turn sour.
The 10/10/80 Path
The financial path 10/10/80 leads you down is rather dangerous. Unfortunately, we’ve even seen churches adopt this myth, and it’s time for us to reevaluate the consequences.
Here’s an example . . . .
A young, 25-year-old person might do fine investing 10% of their income over the course of their lifetime. Let’s say they make $50,000 per year and invest $416 per month (10% of their income) at an 8% annual return until they are 65. That results in almost 1.4 million dollars.
Now, take a 50-year-old, same figures, but instead of having 40 years they have 15 years. They’ll have a little over 146 thousand dollars – not nearly enough for a comfortable retirement.
Another example . . . .
The 10/10/80 method implies that once you reach 10% giving, you should stop. Really? Even though it might not be in the intention of those promoting this popular myth to have people stop giving at 10%, I’m convinced many could view it this way. Imagine multi-millionaires who are prevented from giving tremendous donations that could radically help fantastic organizations, all because they thought 10% was good enough. Should we really limit giving?
A Better Way: The Three Phases of Giving
By following the Three Phases of Giving, you’ll discover that giving and investing shouldn’t be limited 10% each for your entire life. No, giving and investing needs to increase over time as you move through the Three Phases of Wealth. And by the way, investing shouldn’t start right away . . . .
Tithing: 10% Giving (and 0% Investing)
During the first phase of the Three Phases of Wealth – the Foundation Phase – you should give 10% of your income to the church.
A tithe of everything from the land, whether grain from the soil or fruit from the trees, belongs to the LORD; it is holy to the LORD. – Leviticus 27:30 NIV
Now is not the time to start investing, although you will be saving $1,000 in cash and eventually saving 3 to 6 months of expenses in an emergency fund. The last thing you want is for your money to be stuck in an investment when you need it most.
Later, after you get appropriate insurance policies, personalize your estate plan, pay off all your consumer debt, and have an emergency fund, will you start to invest.
The 10/10/80 plan has you putting too much into savings and investments too soon. Timing is everything!
Impact Giving: 10+% Giving (and Short- and Long-Term Investing)
After you have your financial foundation, it’s time to increase giving and start investing in the Accumulating Wealth Phase.
Why should giving be limited to 10% when you’re completely out of non-mortgage debt? Baffles me. Research ministries, organizations, and individuals that could use some help, and donate. Set a giving budget that makes sense for you and your family. But remember, this giving is impact giving which means it is over and above your tithe – you’ll make an additional impact!
By the way, now you’re ready to start investing. Sit down with a Certified Financial Planner™ to begin this process.
Note: One percentage we often talk about at Truth in Financial Planning is the 70/30 rule. Don’t be confused. This rule simply states that 70% of found money (including raises) should go toward your plan (including impact giving) and 30% should go toward increased spending.
Legacy Giving: 10+% Giving (and Strategic Income Management)
During this phase – concurrent with the Strategic Income Phase – final preparations are made to leave a percentage of your estate to a church or ministry that you believe in.
Also, don’t forget to teach your family about giving – let them carry on the legacy!
Be intentional. Following the 10/10/80 method might be easy, but not everything that is easy is worthwhile or helpful. Think about all the people you can help by giving more than 10%. Think of the better inheritance you can leave your children and grandchildren by investing more at the appropriate time.
Don’t get caught in the middle of an over-simplistic financial plan. They’re catchy, but chances are, they will limit your ability to give and spend.
Baked into the Three Phases of Giving and the Three Phases of Wealth is, you guessed it, intentionality. These are proven plans to build wealth and give more than ever before.
Have you heard of the 10/10/80 method? What do you think of it? Leave a comment!