How You can Increase Your Free Cash Flow using the 10-20-70 Rule

George Clason, the author of The Richest Man in Babylon, is responsible for the 10-20-70 Rule.  He tells the tale of the egg merchant going to the gold merchant to find out how the gold merchant got his gold. The gold merchant, delighted that the egg merchant wasn’t asking him for his gold, gladly told his secret of how he got his gold so that the egg merchant could get some gold for himself.

  1. Keep 10% of everything that you make or earn.
  2. Only allow 20% of what you make or earn go to creditors.
  3. Use 70% of everything you make or earn for living expenses:
    1. Tithe
    2. Taxes
    3. Mortgage /Rent
    4. Transportation
    5. Food
    6. Clothing
    7. Education
    8. Utilities
    9. Entertainment/Vacation

5 Questions About The 10-20-70 Rule

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What is the 10-20-70 Rule used for?

2 / 5

The 10-20-70 Rule divides your income into three portions: 10%, 20% and 70%. Each portion is dedicated to a specific category. What category is the 20% used for?

3 / 5

What is the 70% category used for?

4 / 5

If you don’t have debt, how should you divide your income?

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The 10-20-70 Rule is primarily for people struggling financially.

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Using this formula becomes a great way to create free cash flow using participating whole life insurance (PWLI) because the PWLI takes better than average care of your money even if you leverage your PWLI for additional capital to use elsewhere.

For example, if you fund your PWLI with 10% of everything you make or earn, you can borrow against your PWLI to pay off a creditor without losing the growth the PWLI provides.  Then you can pay what you would have paid to your creditor, to yourself.  From there you can pay the insurance company back anything you borrowed against your PWLI, along with any interest that the insurance company charged for the loan. If the PWLI won’t hold all the interest that was going to have to be paid to your creditor but is now being paid to you, then you get to keep that extra money (interest) yourself. This helps to create more free cash flow that you can manage.

If you have no creditors, that means you don’t have 20% of your income tied up in paying creditors back for the loans that they have extended to you. You can use that 20% towards funding your PWLI, or you can use that money to invest.  For example, you may want to use that money to finance your property taxes, your next vacation, or some other living expense that you have been paying with money from your 70%.  Doing so allows you to spend what you would have spent making payments back to yourself for the loan that came from your 20%.

Because you get to determine the payback period as well as the mode of repayment for this loan to yourself, you can authorize yourself to save more money simply by keeping the interest rate high, the modal payment comfortable and affordable, and the payback time period can be stretched out for as long as you like.

Here is why this is important for you.

If you loan yourself $10,000 and you want to charge yourself a 12% annual percentage rate (APR), taking 2 years to pay that $10,000 loan back to yourself, it will be $470.73 every month.  At the end of that 24 months, you will have paid yourself back $11,297.63.  In other words, you have systematically set the grounds for saving an extra $1,297.63 over the next two years. And you have accomplished that without having to really feel the discomfort of reducing your lifestyle.

But maybe $470.73 a month is uncomfortable or unaffordable for you to pay back to yourself every month.  In that case, simply take longer to pay yourself back.  Taking 4 years instead of 2 years to pay back the $10,000 loan you gave to yourself, will reduce your monthly payments to only $263.34.  And in doing so you will also have increased what you are systematically saving of your 70% to $2,640.24 over the next 4 years.

Obviously, you could have used that $10,000 to purchase another PWLI if you designed the continued premiums on the policy after that first $10,000 to be comfortable and affordable for you to manage.  Purchasing another PWLI would also increase your free cash flow because of the internal growth that takes place.  However, you may find an investment that could provide a higher return than a PWLI can, and if so then you may feel that taking that risk to invest might be worth it for you.

The fundamental point about the Perpetual Wealth Code™ is this: You don’t have to repay a PWLI loan as quickly as you would a traditional loan because the PWLI loan is an interest only loan and that allows you to use the money longer, paying only the interest until the loan is paid off.  This freedom in repayment allows you the opportunity to create more free cash flow with that capital than if you immediately had to repay the PLWI loan with principle and interest.

In review of the 10-20-70:  10% you keep, 20% you use to pay creditors (that should become your PWLI or yourself as soon as possible because interest earned is more important to you than interest saved) and finally 70% is used for your living expenses.  These expenses may start out humble and simple like the ones listed above, but as you create more and more free cash flow those living expenses could turn into things like:

  1. Starting your own non-profit or endowment fund
  2. Increasing your charitable contributions
  3. Entrepreneurial endeavors
  4. Funding scholarships
  5. Political donations
  6. Real Estate ventures
  7. Expanding your current business


There really is no end or limit to what all the additional free cash flow that you can develop can be used for. But the good thing is this, free cash flow is money that you can use and control and if you manage it right you can avoid much of the expenses (taxes, fees, penalties and interest) that is associated with not having free cash flow to manage.