12.08.2022 By Amy Miller, AFC®

SAVING FOR YOUR PAST, PRESENT, AND FUTURE: THE 30/40/30 RULE

Our approach to handling a windfall is a simple and easy way to manage what you spend and save and can help you to do the best you can when you have additional funds available. This plan is known as the 30/40/30 Rule.

Follow the 30/40/30 rule to make the most of a Windfall

Windfalls come in many forms – inheritance, tax return, bonus, or maybe a lottery winning. Sometimes they are expected, and sometimes they are not. Either way, deciding what to do with extra money can be challenging and leaves many not knowing how much to spend and how much to save, especially when trying to do the right thing and make the most of the additional funds.

Our approach to handling a windfall is a simple and easy way to manage what you spend and save and can help you to do the best you can when you have additional funds available. This plan is known as the 30/40/30 Rule.

30/40/30 Rule

The 30/40/30 Rule can help you best allocate your extra funds by breaking down your financial life into 3 parts – past, present, and future – and can help you make progress toward achieving your financial goals. Here’s how it works:

*30% goes to outstanding debt and catching up if needed - PAST

*40% goes to current living expenses, emergency fund, other needs and wants - PRESENT

*30% goes to saving for long-term goals, like homeownership, retirement, education and other large purchases - FUTURE

The Past- Outstanding Debt & Catching Up (30%)

Debt is something everyone deals with so don’t be embarrassed by needing to work on past obligations. Debt from the past can weigh you down and prevent you from achieving your future financial goals.

Handling it and bringing everything current and in good standing is vital to building a strong financial foundation.

It may be possible to pay all debt off completely. If not, creating a plan to pay down outstanding debt is the best way to gain control of your overall financial well-being.

There are several methods that can be used. The most popular and well-known are the snowball method (paying the smallest balances first) and the avalanche method (paying the debt with the highest interest rate or cost first).

Both methods are effective when working towards paying down debt and each has its own benefits. It really comes down to your individual situation and which method you prefer.

The Present- Current Living Expenses, Needs & Wants (40%)

Having extra money provides an opportunity to really get a handle on your current expenses, your needs and wants, and can help get you a step closer to meeting all your financial goals. Addressing your current needs is important. Start with a list and prioritize, and don’t forget to establish or increase your emergency fund! If you’re starting out, start small and think big with a goal of $500 first, then continue building.

Once your current needs are taken care of, you can enjoy some of your wants. Indulging and having fun is okay too – but resist the urge to splurge too much and stay as close to 40% as possible.

The Future- Establish and Build Savings (30%)

Once you have your past debts and current needs are taken care of you can think and plan for your future needs and wants and ensure you have a safety net to handle life’s many changes, challenges, and opportunities. Start by establishing an emergency fund with the goal of $500 and build from there. Saving a portion of your windfall will help you start securing a financially healthy future, like purchasing a home, retirement, transitioning out of the military, your children’s education, or a vacation.

Making the Most of Your Extra Money

Without a plan, even large amounts of extra income can quickly diminish. Having a realistic spending and savings plan for your extra cash is essential to making the most of it. Proactively managing your past debts and present expenses will allow you the ability to work toward your future goals and make the most of your extra money.

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