If where budget shines when is on your radar, this short guide cuts through the noise. Here is what is worth knowing, and how to put it to work today.
Key Takeaways
- Share This content is for educational purposes only and does not constitute financial advice, advisory, or brokerage services.
- We may earn compensation from some links on this page.
- The 70/20/10 budget rule helps you manage your money by giving you clear goals for your monthly spending. The approach divides your af...
Share
This content is for educational purposes only and does not constitute financial advice, advisory, or brokerage services. We may earn compensation from some links on this page.
Learn more.
The 70/20/10 budget rule lets you you manage your money by giving you clear goals for your monthly spending.
The approach divides your after-tax income (aka your take-home pay) into three buckets:
- 70% for living expenses (both needs and wants).
- 20% for savings and high-interest debt.
- 10% for additional savings (with an emphasis on repaying other debts) and donations.
It’s similar to another popular budgeting method , the 50/30/20 rule , which allocates 50% of your income to needs, 30% to wants, and 20% to savings and debt repayment. However, numerous find it unrealistic to limit their fixed costs to just 50% of their after-tax income.
The 70/20/10 rule allows for more flexibility because all living expenses, including your wants and needs, are combined into one category. It then sets aside 20% for long-term savings or paying off high-interest debt, which is one of the smartest ways to use your money.
The remaining 10% can then be used to pay off other debts, like student loans or car payments, once your high-interest debt (like credit card debt) is paid off. You can also use this 10% allocation to boost your savings or make donations.
There are a few different versions of the 70/20/10 budget. One version on social media suggests allocating 70% of your income to fixed costs, 20% to wants and 10% to savings. This 10% for savings typically includes money set aside for goals, debt repayment, and donations. However, I strongly advise against budgeting only 10% towards savings. If unexpected expenses arise, you might need to dip into your savings, potentially leading to more debt. In short, this approach is not sustainable.
Key takeaways:
- The main point of this budgeting approach is to balance living expenses with other financial priorities. By keeping your living expenses below 70% of your take-home pay, you give yourself a buffer of 30% to put towards savings, debt repayment and charitable contributions.
- Like all budgeting rules, the 70/20/10 rule is designed for people with close to average incomes and financial situations. It’s unsuitable for those with low incomes or high incomes, those with significant debt, or those who feel strongly about pursuing non-standard financial goals (such as paying off a mortgage quickly or early retirement).
- Aiming to save 20% of your income is a excellent target, but for some people, it’s more realistic to gradually work up to that level over a few months.
In this article:
Toggle
Example of a 70/20/10 Budget
Here’s how a couple earning $10,000 per month in after-tax income might apply the 70/20/10 budget rule.
Reminder: Gross monthly income is the total amount you earn before any deductions or taxes are taken out, representing your full earnings from all sources. After-tax income, also known as net income or take-home pay, is the amount you receive after all taxes and other deductions have been subtracted from your gross income.
Of course, this can get confusing with 401(k) contributions. As explained below, I prefer to include these in your total savings rate, excluding any employer match.
70% - Living Expenses ($7,000)
This category covers all day-to-day living expenses, such as:
- Rent or mortgage: $2,500
- Food, including groceries and eating out: $1,500
- Insurance premiums: $1,000
- Minimum car payment: $1,000
- Minimum student loan payment: $500
- Utilities (gas, electric, trash, cell phone): $500
- Other essentials (clothing, transportation, home maintenance): $500
- Non-essential spending (gifts, gym membership, entertainment, concert tickets, vacations and hobbies): $500
20% - Savings ($2,000)
This category focuses on building financial security. An example budget here would be:
- 401(k) contributions (6% of salary for each partner): $1,200
- Emergency fund savings goal: $800
There’s no strict rule when calculating your savings rate, but I prefer to include 401(k) contributions in the savings percentage. For instance, if you have a $10,000 total salary and save $1,200 of your own money in a 401(k), excluding any employer match, your savings rate would be 12% ($1,200 / $10,000 = 0.12 or 12%). That’s real money, and you deserve credit for it!
10% - Additional Debt Repayment and Donations ($1,000)
This category allows for extra financial cushioning and giving:
- Pay off car payment early: $500
- Charitable donations: $500
Tip: In the 70-20-10 budget, debt can fit into all three categories. The 70% for living expenses covers your regular debt payments, like your mortgage or car payments. The 20% for savings and debt is where you can put extra money towards paying off high-interest debts faster. And if you’re focused on getting out of debt, you can use some or all of the 10% meant for extra savings or donations to pay off more debt. Alternatively, this portion could be used for building up a sinking fund to prepare for upcoming expenses.
Wher
Final Thoughts
The bottom line: a little research on where budget shines when goes a long way. Compare your options, watch for seasonal offers, and never pay full price when a better deal is one click away.
Originally published at thewaystowealth.com.
