How the 20/10 rule works
This his how the 20/10 rule works!
The 20/10 rule is a rule of thumb that says your total debt shouldn’t be more than 20% of your annual income, and your monthly debt payments shouldn’t exceed 10% of your monthly income.
Note: This does NOT include mortgage or housing payments!
It applies to consumer debt, like payments to credit cards, auto loans, student loans, and more.
So if you make $48,000 a year which = $4,000 a month...
This would mean you shouldn’t have more than $9,600 in total debt and $400 in monthly debt payments.
If you make $60,000 a year, which = $5k a month...
That’s a max of $12,000 in total debt and $500 in monthly debt payments.
The pros of this guideline:
It’s a concrete guideline for managing finances and it helps you limit the amount you borrow.
The cons:
It doesn’t include mortgage or housing payments, and it’s difficult to adhere to if you have student loan debt.
Does the 20/10 rule work for your finances?
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