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Definition: The 20-10 rule is a conservative rule of thumb for other consumer credit that does not include housing payments.
What exactly does that mean?
This means that your total household debt (excluding housing payments) should not exceed 20% of your net household income. (Your net income is the amount you actually “take home” after tax on your salary.) Ideally, your monthly payment should not exceed 10% of the net amount you bring home.
How To Utilize The 20-10 Rule
For example, if you bring home $60,000 a year, your total consumer debt should not exceed $12,000 and your total monthly payments should not exceed $500 per month.
What’s the main purpose of the 20 – 10 rule?
The main purpose is to help you create a guided structure of the debt you actually have to pay. In addition to this, this rule also helps you visually see how much you are spending and where you are doing your spending. This allows you to clearly set financial goals for the period in which this rule is used.
This rule may not be immediately useful to everyone. It all depends on how much debt you have and whether that debt has adversely affected your creditworthiness. If you plan using the 20-10 rule, it is essential to speak with a professional that can help you with any questions regarding how you can pay off your debt as well as boost your credit to get better rates when trying to pay off the debt itself. Need resources to help you? Click here.