The 3–10-70 Method

[This is an ongoing series called My Money Story. To Read the rest of the series click here]

I didn’t learn much about money from my parents. And the public school I grew up in didn’t even try to teach us how to use money. So where did I learn how to handle a paycheck?

The first person to teach me about money was my youth pastor.

He only gave the sermon once, and I was 16 at the time, but when I got my first job at 18 I used the lessons he taught as an outline for how I would handle money.

3–10-70

In the sermon, my pastor laid out what I have come to call the 3–10-70(three-ten-seventy) method for handling money. I used it from 2004 until the end of 2008 and during that time I was notice­ably better finan­cially than my friends.

Not to say I was good with money, I wasn’t, but I was better than most people my age.

Basically, 3–10-70 takes a paycheck and splits it into 4 cate­gories. The amount that goes into each category is chosen by percentage:

• 10% is given away (tithe).
• 10% goes into an emergency fund.
• 10% goes into long-term savings (6 months or more).
• 70% goes to monthly expenses.

This method does a lot of things right.

• It encour­ages giving. This way, money isn’t something that needs to be hoarded.
• It saves for emer­gen­cies. 10% of your paycheck may not be much, but after a year or so it builds up. When the car breaks down, a job is lost, or something else pops up that 10% you’ve been dutifully saving will come in handy.
• It lets you have big purchases. Putting away 10% every month with no other purpose than to spend it later is a great thing. When you want an x-box, a nice TV, a new computer, or even a car that 10% you’ve been saving for 6 months to a year comes in handy.

As for the 70% for monthly expenses, one of the things my pastor said stuck with me:

“If you can live on 70% of your income, you will do really well financially”.

I agree with him. If you can live 30% below your means you will be much better off when something happens to those means.

Did It Work?

It worked for awhile. I was able to buy things I wanted (like a PS2), I was prepared for emer­gen­cies, I gave away 10% or more of my paycheck each month, and I was easily living off 70% of my income.

But there are some big issues that caused major problems down the road.

3–10-70 doesn’t care about where money is going. It’s easy to overdraft and overspend.

The only time I ever over-drafted was in 2006. At the time, my bank wouldn’t show a trans­ac­tion until 3–4 days after it happened, so even though my account showed $40 bucks, $35 of it was gone from the weekend before.

Over­spending meant I was hit with a $40 dollar fee and then $7 bucks a day after that. I didn’t check my balance enough and was negative for a few days. My emergency fund was used and I bought positive, but I didn’t bring it high enough. Another forgotten expense came through and the process started over again. By the end of the week, I lost over $1,000 to overdraft fees.

To call that stupid tax would be an under­state­ment. If I had tracked my spending I would have never gone negative in the first place.

Although painful, the lesson was learned: Always know how much money you have in the bank.

I never really recovered. A lot of small emer­gen­cies would come up over the next few years stopping me from getting my emergency fund above a few hundred bucks. I was living paycheck-to-paycheck with no end in site.

And besides my pastor, the only other place I learned anything about money was from credit card offers, tv shows, and car dealers. But more on that next week.

What is the dumbest thing you have done with money? (believe it or not, the overdraft isn’t even the worst mistake I made…)