Like many people, I’ve always found budgeting a bit of a daunting task. Spreadsheets, endless categories, and the constant feeling of restriction? It just never seemed to stick.
I’ve tried various methods over the years, but I always found myself either overwhelmed or quickly falling off track. I knew I needed a simpler, more sustainable approach to managing my finances – something that wouldn’t feel like a constant battle against my own spending habits.
That’s when I stumbled upon the 70-20-10 budget rule.
Initially, I was skeptical. Could something so straightforward actually work? But the more I read about it, the more it resonated with me.
The idea of allocating my after-tax income into just three main categories – living expenses, savings and investments, and debt repayment or donations – felt refreshingly manageable.
So, I decided to give it a try. And what I discovered was a budgeting method that finally clicked. It wasn’t about deprivation; it was about conscious allocation.
It allowed me the flexibility to enjoy my life while still making progress towards my financial goals. In this guide, I want to share my experience with the 70-20-10 rule, breaking down the implementation steps and highlighting the benefits I’ve personally experienced.
I hope that by sharing my journey, I can help you find a budgeting approach that works just as well for you.
What is 70 20 10 budget rule
The 70-20-10 budget rule is a simple financial guideline that helps individuals manage their income effectively.
Under this rule, you allocate 70% of your after-tax income for living expenses, which includes both essential needs and discretionary spending.
The next 20% is designated for savings and investments, allowing you to build an emergency fund or save for future goals.
Finally, the remaining 10% is set aside for debt repayment or charitable donations.
This budgeting approach encourages mindful spending while ensuring that you prioritize savings and financial responsibilities, making it easier to achieve your financial objectives.
Benefits of the 70-20-10 Rule
Simplicity: The 70-20-10 rule is straightforward and easy to understand, making it accessible for beginners.
Flexibility: The percentages can be adjusted to fit individual financial needs and circumstances.
Mindful Spending: It promotes awareness of spending habits and helps prioritize financial goals.
Consistent Saving: It ensures consistent saving and investment, which is crucial for building long-term financial security.
By following these steps, individuals can effectively implement the 70-20-10 budget rule to manage their finances, save consistently, and achieve financial independence.
Breakdown of the 70-20-10 Rule
70% for Living Expenses:
This portion covers both essential and discretionary spending, including necessities like rent, utilities, groceries, and other lifestyle expenses such as entertainment and dining out. Unlike some budgeting methods that separate needs from wants, the 70% allocation combines both into a single category, making it easier to manage overall spending.
20% for Savings and Investments:
This segment is dedicated to building financial security through savings accounts, retirement funds, or investments in stocks and bonds. The goal is to create an emergency fund or save for future financial goals
10% for Debt Repayment or Donations:
The final 10% can be directed towards paying off additional debt beyond minimum payments or making charitable donations. This aspect makes the 70-20-10 rule unique compared to other budgeting strategies, as it explicitly encourages giving back.
The 70-20-10 budget rule is a simple, percentage-based approach to managing personal finances by dividing after-tax income into three categories: 70% for living expenses, 20% for savings and investments, and 10% for debt repayment or donations. This method helps individuals allocate their income effectively, ensuring consistent saving and mindful spending.
The 70-20-10 budget rule is a simple, percentage-based approach to managing personal finances by dividing after-tax income into three categories: 70% for living expenses, 20% for savings and investments, and 10% for debt repayment or donations. This method helps individuals allocate their income effectively, ensuring consistent saving and mindful spending.
Steps to Implement the 70-20-10 Budget Rule
1. Calculate After-Tax Income:
The foundation of the 70-20-10 rule is your net or after-tax income. This is the amount you receive after deductions for taxes and other contributions. Knowing this figure provides a clear starting point for allocating your funds.
2. Allocate 70% for Living Expenses (Needs and Wants):
This segment covers essential costs such as rent, utilities, groceries, and transportation. It also includes discretionary spending like entertainment, dining out, and leisure activities.
Differentiate Between Needs and Wants: It can be helpful to distinguish between fixed expenses (e.g., rent, vehicle loans) and variable expenses (e.g., food, leisure).
Track Spending: Monitor where your money goes to ensure adherence to the budget. Review bank statements, credit card bills, and receipts to understand your spending habits.
Adjust as Necessary: If essential expenses exceed 70% of your income, consider ways to reduce costs, such as finding a cheaper apartment, using public transport, or cutting back on non-essential spending.
3. Allocate 20% for Savings and Investments:
This portion is dedicated to building financial security through savings accounts, emergency funds, and investments like stocks, bonds, and retirement accounts.
Set Savings Goals: Determine your risk tolerance and financial goals to choose the appropriate savings methods.
Build an Emergency Fund: Start with a small, achievable goal, like saving \$1,000, and gradually increase it to cover 3-6 months of living expenses.
Consider Pre-Tax Savings: If you already save pre-tax income in retirement accounts like a 401(k), you may not need to save as much of your after-tax income.
4. Allocate 10% for Debt Repayment or Donations:
The final 10% is allocated to additional debt payments or charitable donations.
Debt Repayment: Use this portion to make extra payments on debts like student loans or medical bills.
Donations: Contribute to charities, causes, religious organizations, or support family members.
5. Track and Adjust the Budget:
Monitor Spending: Regularly track your expenses to ensure you adhere to your allocated percentages.
Use Budgeting Tools: Utilize budgeting apps or spreadsheets to monitor your income, expenses, and savings.
Review and Adjust: Periodically review your budget to make necessary adjustments based on changes in your financial situation or goals. If you have large debt balances, consider temporarily allocating a larger portion of your income to debt repayment.
What are some common challenges people face when following the 70-20-10 rule
Some common challenges people face when following the 70-20-10 rule include difficulties in maintaining a high savings rate, not separating essential and nonessential expenses, and a lack of nuance in addressing debt priorities.
Specific challenges:
- High savings rate It can be difficult to immediately set aside 20% of take-home income for the future, so it’s better to start where you can, saving a little at a time.
- No separation for work and play The 70/20/10 rule doesn’t separate essential and non-essential expenses. Seeing the percentage of income used for fun can provide perspective.
- Lacking nuance Simplified budgets may not capture financial nuances, such as debt priorities, where 10% of income might not be enough to cover everything1. Those with higher interest rates may find it counterproductive to limit repayments to 10% of their income while saving 20%.
To succeed with the 70/20/10 rule, it’s important to track expenses, adjust the percentages as necessary, and automate savings. The rule should be treated as a flexible framework and customized to individual needs.
How can I adjust the 70-20-10 rule to fit my specific financial goals
You can customize the 70-20-10 rule to fit your needs and financial goals by adjusting the percentages to align with your priorities. Here’s how:
Evaluate your financial goals Consider your short-term and long-term financial goals. Assess how the 70-20-10 budget aligns with these goals. If you have a higher income, you might be able to save substantially more and reach savings goals sooner.
Adjust the percentages as needed If you can’t fit living expenses into the 70% category, allocate a bit more to that category and put less in short-term savings until your income increases. Those with large debt balances may want to switch the portion of income that goes toward debt repayment and savings until the debt is paid off.
Prioritize high-interest debt Increase the paying debt/savings percentage to higher than 20% until your debt is lower.
Consider your lifestyle and priorities If discretionary spending is important to you, the 10% allocation can provide flexibility for entertainment, hobbies, vacations, or other personal expenses. If you’re focused on minimizing expenses and saving aggressively, you may need to adjust the percentage allocated to discretionary spending or choose to save it entirely for a period of time.
Factor in extra income Bonuses, tax refunds, money from side hustles and other income should be factored in later, as they are earned; don’t consider them as part of your base income. The bulk of the extra income can be designated toward the area most in need of attention, such as paying off credit card debt or boosting emergency savings.
Protect the 10% Avoid tampering with the 10% allocation for investing for the future. The sooner you start saving for retirement, the more that money will add up over time. Older people who may need to catch up on retirement savings may want to increase this 10% allocation.
Track expenses Continue to track expenses so you can see when you can readjust allocations back to the original 70-20-10 plan.
Seek professional advice If you’re unsure about the 70-20-10 budget’s suitability for your situation, consider consulting a financial advisor. They can provide personalized advice based on your unique circumstances, help you create a budget, and guide you toward achieving your financial goals.
What should I do if I can’t fit my living expenses into the 70% category
If you’re struggling to fit your living expenses within the 70% allocation of the 70-20-10 budget rule, the first step is to understand where your money is going. Begin by meticulously tracking your spending for a month to differentiate between essential needs and discretionary wants.
Once you have a clear picture, identify areas where you can realistically cut back. This might involve finding more affordable housing or transportation options, reducing entertainment expenses, or negotiating lower rates on recurring bills.
Temporary adjustments to the budget can also help, such as allocating a slightly larger percentage to living expenses while reducing the savings or debt repayment portions until your income increases or your expenses decrease.
Beyond expense reduction, explore opportunities to increase your income. This could involve seeking a raise at your current job, taking on a side hustle, or pursuing additional skills or education to qualify for higher-paying positions.
Remember, the 70-20-10 rule is a flexible framework, not a rigid mandate. It’s designed to guide you towards financial stability, but it should be adapted to your specific circumstances.
Prioritize your immediate needs while working towards a long-term plan that allows you to balance your expenses, savings, and financial goals effectively.