What is the 70-20-10 budget rule?
Quick insights
- The 70-20-10 rule suggests dividing your after-tax income into three categories.
- You might allocate about 70% to spending, 20% to saving and 10% to extra debt payments or donations.
- This framework may offer a helpful path to balancing your everyday expenses with your future goals.
There are plenty of budgeting strategies out there that may help you manage your money. If you're looking to give your spending some structure without tracking every single dollar, you might consider the 70-20-10 budget option. This method may offer a clearer approach to managing your finances, making it less complicated than micromanaging every purchase.
What the 70-20-10 rule entails
The 70-20-10 rule is designed to help you take control of your finances with less effort. This budgeting strategy divides your take-home pay—the money you bring in after taxes—into three percentage-based categories: spending, saving and debt repayment or giving.
Unlike the 50-30-20 rule, which separates your needs from your wants, the 70-20-10 budget tries to simplify this by lumping your cost of living and your discretionary spending together into one category.
While the 70-20-10 rule can be a beginner-friendly approach to budgeting, some people may find it lacks nuance. If your needs evolve, you can view the budget as a general guideline and tweak the percentages to fit your situation.
Allocating 70% for spending
The largest portion of your budget goes toward your everyday expenses. This might include fixed costs like rent and utilities, as well as variable expenses like groceries, concert tickets or meals out with friends.
Any minimum debt payments you might have would also fall into this 70% category. Making your minimum payments may be required to keep your accounts in good standing, so they're considered an essential living expense.
While this approach may simplify tracking, some people find that the lack of separation between essential and discretionary purchases encourages overspending. One way to mitigate this is to monitor your spending habits more closely within this large category.
Saving 20% of your income
Next, this budgeting system suggests allocating one-fifth of your net income to savings and investments. Building a financial safety net may be a helpful way to prepare for unexpected costs, like a sudden car repair or a medical bill.
You might choose to put this money into an emergency fund, save for a down payment on a house or contribute to a retirement plan. Keeping these funds in a savings account may help you earn interest over time.
If 20% isn’t a feasible target for you, that’s okay. You can save whatever amount feels reasonable for now and work your way up to 20% over time.
Using 10% for extra debt or donations
The final 10% of your budget may go toward paying down debt or donating money. Because your 70% spending category already covers your minimum payments, you might use this final portion to make additional payments on balances like student loans or medical debt.
If you don't have extra debt to pay off, you could direct this portion of your income toward charitable contributions. This may include supporting causes you believe in, donating to an alma mater or even helping family members financially.
Alternatively, if 10% of your income isn’t enough to cover your debt priorities, you may need to adjust how much of your income goes toward debt repayment.
Strategies to start using the 70-20-10 budget
To implement the 70-20-10 budget, you might consider following a few steps to get your accounts organized.
- Calculating your net income: Review your pay stubs to determine exactly how much money you bring home each month after taxes and deductions.
- Reviewing your recent spending: Look at your past bank statements to see how much you typically spend. This might help you figure out if your current habits fit within the 70% limit.
- Automating your savings: You might consider setting up automatic transfers from your checking account to your savings account.
Tips to help you stick to your budget
Sticking to a budget may be challenging when life throws unexpected expenses your way. Having a few strategies in place might help you stay on track and adjust when necessary.
- Tracking your progress: While you don't need to track every single category, keeping an eye on your overall spending may help ensure you don't exceed your 70% limit.
- Adjusting the percentages: You might modify the 70-20-10 rule to fit your unique financial needs. If your rent and living expenses require more than 70% of your income, you may need to temporarily reduce your savings or donation categories.
- Prioritizing high-interest debt: If you have credit card balances with high interest rates, you might consider using your 10% category to pay those down quickly before focusing on donations.
The bottom line
Taking control of your finances doesn't have to be difficult. By grouping your essential and nonessential expenses together, the 70-20-10 method may be less complicated than tracking dozens of categories. If you're looking for a clear path to managing your everyday expenses while still planning for the future, this framework might be a fit for your financial goals.
