The Investor's Manifesto

Coca Cola’s 70/20/10 Rule: How Can You Apply This On Your Personal Finances?

By Ian Elbanbuena

Josh Leibowitz, partner at McKinsey & Company, wrote an opinion piece about Coca-Cola’s innovation strategy, in which he posted an interesting observation:

“An important part of that success has to do with their (Coca-Cola’s) marketing investment strategy. About 70% of their investment is in “Now”, or established and successful programs; 20% goes to “new,” or emerging trends that are starting to gain traction; and 10% goes to “next,” ideas that are completely untested. This is what Coca-Cola applied to their company as a marketing strategy. It became successful tactic that led to their company’s growth and success.”

The 70/20/10 rule is a business framework usually applied in the fields of learning and innovation management. It is also sometimes applied to content planning and marketing. The manufacturing giant took this business model and used it for implementing innovative marketing ideas.

The fact that Coca-Cola is a successful global company and advertiser only extends credibility to this proposition.

But do you know that the 70/20/10 rule can also be applied to your personal finances?

The 70/20/10 Rule Applied to Personal Finances

In the same way that Coca-Cola applied the 70/20/10 rule in their marketing investment, you can also determine areas in your personal finance which you can prioritize over others. To follow Coca-Cola’s example: you could start by alloting 70% of your income to your biggest priority—which should be your daily, weekly, or monthly expenses.

Around 20% of your income should go to paying debt—a related expense but not so urgent. Finally, the remaining 10% of you income should be for savings. It seems simple but it would take a lot of determination to carry out a plan like this. If you want to apply the 70/20/10 rule to your personal finance, get started by creating a budget plan.

How To Create a Budget

A budget plan helps you track and manage your spending. Here’s how to construct one:

1. Review your finances.  Identify all sources of income and compute your monthly total.
2. Calculate your expenses by looking at monthly bills and receipts over the past months. It helps if you keep receipts of all your purchases as it helps you track your spending.
3. Assess your priorities and see which areas you can improve upon. Did you spend too much on dining or leisure? Find ways to cut back spending on non-necessities and re-asses your priorities. Spend for important things first, such as paying credit card debt.
4. Define your goal. How much would you like to save in five or 10 years? What are your plans for retirement? Where do you plan to send your kids to school? If you are not in the habit of saving, better start now.

70% for Expenses

Expenses takes up the largest portion of your monthly income. These include the bills for utility (electricity, water, and gas), food, mortgage, or rent. Nowadays, even other services like internet and mobile plans are already considered a monthly expense in most households. If 70% of your income doesn’t seem to be enough, then it might be time for you to find ways to get more income.

20% for Debt Payments

Debts can be classified as an expense, although not as urgent as basic expenses. Setting aside a significant portion of your income for paying off credit cardbalance, loan payments, mortgage, and other outstanding debts enables you to be more disciplined with how you spend and budget your money. With the 70/20/10 plan, you can get some idea of when you can finally be debt-free. Little by little, you can increase the percentage you allot for savings or expenses.

10% for Savings

Designating a small portion of income for savings is important for any household. In terms of personal finance, a savings fund is useful for capital purchases like a house or a car, for your children’s college education, or any unexpected expense.

There are different methods for saving such as deposit accounts, a pension plan, or even the traditional piggy bank. Just as long as you make sure not to touch 10% of your income, you will be able to accumulate enough savings to get you through the rainy days.

How To Save More

The part of your income not spent is called savings. If you often find that there is not money enough left to save, then you might consider setting aside money for saving before you start spending. The following are other tips you can try:

• Avoid spending money for things you don’t really need, such as expensive clothes and shoes. Eating out all the time, buying cinema tickets often, or splurging on expensive coffee can put a serious dent in your budget, if you look at the bigger picture. Find ways to save applying minor tweaks in your lifestyle.
• Open a retirement fund, which will serve to help you become financially prepared when the time comes for you to stop working. Do not wait until it is too late. Start saving for retirement while you are still young and able.
• Use green products such as eco-friendly and energy efficient appliances. You can also make use of household cleaning products rather than buying commercial ones. Not only is it budget-friendly, they are also safe and non-toxic. 

Consider the 70/20/10 rule as an initial step to getting on top of your personal finances and credit card debt. Although the rule may not be applicable to all—since people have different incomes and varying debts—it establishes the good practice of setting goals and assessing financial priorities.

Source: http://i2mag.com/

Quote for the day

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