The 70/20/10 budget rule is a personal finance guideline that suggests that you allocate your post-tax income in the following way:
- 70% for everyday expenses, including housing, transportation, and groceries
- 20% for savings
- 10% for debt repayment and donating
This rule provides a general framework for how you can distribute your income and make sure that you are taking care of your immediate needs and also planning for the future.
How the 70/20/10 Budget Rule Works
To use the 70/20/10 budget rule, you start by calculating your total income for the month after taxes and other payroll deductions. This can be your salary, any additional income from side hustles, or other sources. Next, you divide your income into the three categories: essential expenses, savings, and debt repayment and donations.
For essential expenses, you should aim to spend no more than 70% of your income. This includes all the necessary expenses that you need to pay for on a regular basis, such as rent or mortgage payments, utilities, transportation costs, and groceries.
For savings, you should aim to save or invest 20% of your income. This includes things like saving for emergencies, paying off debt, and investing in your future. This category is important because it helps you build a financial cushion and prepare for unexpected expenses or long-term goals.
The final 10% of your budget in this category can go towards paying down debt or donating money. When it comes to debt, this category is for debt that isn’t immediately due, like making extra payments on student loans or medical debt. On the other hand, minimum payments usually fall within your monthly expenses, like credit card debt payments or car loan payments. The donation aspect of the 70-20-10 budgeting rule is what makes this guideline unique, as most budgeting guidelines don’t have donations explicitly included in the budget.
Example of a 70/20/10 Budget
Here is an example of how the 70/20/10 budget rule might work for someone who earns $3,000 per month:
- Essential expenses: $3,000 x 70% = $2,100
- Financial goals: $3,000 x 20% = $600
- Personal enjoyment: $3,000 x 10% = $300
In this example, the person would allocate $2,100 for essential expenses, $600 for financial goals, and $300 for personal enjoyment.
Advantages of the 70-20-10 budget
There are several advantages to using the 70/20/10 budget rule:
- It provides a clear framework for allocating your income. By following the rule, you can make sure that you are taking care of your immediate needs and also planning for the future.
- It helps you save money. By setting aside 20% of your income for financial goals, you can build a financial cushion and save for emergencies or long-term goals.
- It allows for some flexibility. The 70/20/10 budget rule is a guideline, not a strict rule, so you can adjust it to fit your specific financial situation.
- It helps you balance your finances. The 70/20/10 budget rule allows you to allocate your income in a way that helps you take care of your immediate needs, save for the future, and also have some fun.
Disadvantages of the 70-20-10 budget
There are also some disadvantages to the 70/20/10 budget rule:
- It may not work for everyone. The rule is based on a general framework, so it may not be suitable for everyone’s specific financial situation. For example, if you have high levels of debt or are in a high cost of living area, you may need to allocate a larger percentage of your income towards essential expenses and financial goals.
- It may be difficult to stick to. The 70/20/10 budget rule requires discipline and careful planning to follow. It may be difficult to stick to the budget if you have unexpected expenses or are not used to budgeting.
- It may not account for all expenses. The 70/20/10 budget rule only covers three broad categories of expenses. You may have other expenses that do not fit into these categories, such as medical expenses or gifts for loved ones, that you need to budget for separately.
How the 70/20/10 Budget Compares to the 50/30/20 Budget
The 70/20/10 budget rule is similar to the 50/30/20 budget rule, which suggests that you allocate your income in the following way:
- 50% for necessities, including rent or mortgage payments, car payments, groceries, insurance, health care, minimum debt payment, and utilities
- 30% for wants, including dining out, clothes shopping, entertainment, and other optional expenses
- 20% for savings and other financial goals, including saving for emergencies, paying off debt, investing, and contributing to retirement accounts
Both the 70/20/10 budget rule and the 50/30/20 budget rule are percentage-based budgets that divide your take-home pay into three broad categories and prioritize saving money and contributing positively to your financial future. However, the 70/20/10 budget rule does not separate needs from wants when it comes to spending and also designates a portion of your pay to go towards donations or giving to others.
Which budget rule you choose to follow will depend on your financial goals and circumstances. If you want to prioritize saving and financial goals, the 70/20/10 budget rule may be a good fit for you. If you want to focus more on separating your expenses into needs and wants, the 50/30/20 budget rule may be a better option.
Fixed vs. variable expenses
When budgeting, it’s important to understand the difference between fixed expenses and variable expenses. Fixed expenses are expenses that remain the same each month, such as rent or mortgage payments, car payments, and insurance premiums. Variable expenses, on the other hand, can vary from month to month, such as groceries, utilities, and transportation costs.
Understanding the difference between fixed and variable expenses can help you make a more accurate budget and plan for your financial goals. For example, if you have a high percentage of fixed expenses, it may be more difficult to save or invest a large portion of your income.
Other budgeting methods
There are many different budgeting methods that you can use to manage your finances. Here are a few examples:
Incremental budgeting is a budgeting method where you start with your current budget and make small changes to it over time. This method can be useful if you want to make gradual changes to your budget rather than making drastic changes all at once.
Value proposition budgeting
Value proposition budgeting is a budgeting method where you allocate your budget based on the value that different activities will bring to your personal life. This method can help you prioritize your spending based on what will bring the most value to you.
Zero-based budgeting is a budgeting method where you start with a blank slate and allocate every dollar of your budget to specific expenses or activities. This method can be useful if you want to have complete control over your budget and make sure that every dollar is accounted for.
Also, called “cash-only budgeting”, the envelope system is a method where you allocate a certain amount of cash to envelopes labeled with different categories of expenses, such as rent, groceries, and entertainment. When you need to make a purchase in one of these categories, you use the cash in the corresponding envelope. This method can be a good way to stay on track with your budget and avoid overspending, but it may not be practical for all expenses, such as bills that need to be paid online.
The pay-yourself-first budget is a budgeting method where you prioritize saving and investing a portion of your income before paying your bills and other expenses. This method is based on the idea that it is important to take care of your own financial well-being before taking care of others. It can be a good way to ensure that you are saving and investing enough for your long-term financial goals.
The “No Budget” Budget
The “no budget” budget is a budgeting method where you do not track your expenses or set specific spending limits. Instead, you focus on living below your means and being mindful of your spending habits. This method can be a good fit for people who don’t want to spend a lot of time tracking their expenses, but it may be more difficult to achieve financial goals or save for the future without a specific plan in place.
Places to Put Your Savings
If you are following the 70/20/10 budget rule or any other budgeting method that involves saving a portion of your income, it’s important to decide where to put your savings. Some options for storing your savings include:
- A high-yield savings account: A high-yield savings account is a type of savings account that earns a higher interest rate than a traditional savings account. This can be a good option if you want a safe place to store your money and also earn some interest on it.
- A certificate of deposit (CD): A CD is a type of savings account where you agree to leave your money in the account for a specific amount of time in exchange for a higher interest rate. CDs have fixed terms, so you need to be prepared to leave your money in the account for the entire term.
- An investment account: An investment account, such as a 401(k) or IRA, is a way to save for the long term and potentially earn higher returns through investing. These accounts have different rules and restrictions, so it’s important to do your research and understand the risks and potential rewards before investing.
- A home emergency fund: An emergency fund is a specific type of savings account that is set aside for unexpected expenses, such as a home repair or medical bill. It’s a good idea to have at least a few months’ worth of essential expenses saved in a home emergency fund in case of emergencies.
It’s important to choose the right place to store your savings based on your financial goals and risk tolerance. You may want to consider consulting with a financial advisor to help you make the best decision for your specific situation.