How the 70 20 10 Budget Rule Works

How the 70 20 10 Budget Rule Works: A Clear and Knowledgeable Explanation

As I was looking for ways to take control of my finances, I reviewed my past few months’ worth of bank and credit card account statements.

From there, I made a list of all the things I’ve spent on during the month – both periodically and occasionally. It was eye-opening to see where my money was going and helped me identify areas where I could cut back.

According to a recent Morning Consult poll, I’m not alone in wanting to create and maintain a budget. In fact, 89% of U.S. adults who have financial goals feel the same way. To help make the process less confusing, I came across the 70/20/10 budget rule. In this article, I’ll explain what it is and how it can put you on the right track financially.

What Is the 70/20/10 Budget Rule?

The 70/20/10 budget rule is a simple and effective strategy that can help you manage your finances and achieve your financial goals. This rule involves dividing your take-home pay into three buckets, each with a specific percentage allocation.

The first bucket is for monthly bills and daily spending, which should account for 70% of your income. This includes expenses such as rent or mortgage, utilities, transportation, insurance premiums, food, clothing, and entertainment. You should also include periodic expenses like travel, haircuts, and gifts in this category, and estimate their monthly costs to ensure that you have enough money to cover them. If you contribute to a self-funded retirement plan like an IRA, you should also include these amounts in this bucket.

The second bucket is for saving and investing, which should account for 20% of your income. This money can be put away for an emergency fund, college tuition, investments, or future big purchases. By consistently saving and investing a portion of your income, you can build a solid financial foundation and work towards achieving your long-term financial goals.

The third bucket is for additional debt payments or donations, which should account for 10% of your income. If you have outstanding debts, it is important to pay them off as quickly as possible to reduce finance fees and improve your credit score. If you don’t have any debts, you can use this money to support causes that are important to you.

By following the 70/20/10 budget rule, you can gain greater control over your finances and make smarter financial decisions. With a clear understanding of where your money is going, you can prioritize your spending, save for the future, and achieve your financial goals.

A 70/20/10 Budget Example

If I take home $3,000 per month, I can allocate my money using the 70/20/10 budget. This budget suggests that I should designate $2,100 for monthly bills and spending, deposit $600 into a savings or investment account, and earmark $300 for debt payoff or donations.

This budget can help me prioritize my financial goals, refine my spending, accelerate deleting my debt, and ensure I’m saving enough for unexpected costs. According to Lawrence Sprung, certified financial planner, founder of Mitlin Financial and author of the book “Financial Planning Made Personal,” this budget can be a useful tool to guide me in achieving my financial objectives.

How to Prepare a 70/20/10 Budget

To create a 70/20/10 budget plan, I need to do some prep work. First, I must determine how much money is coming in and going out by reviewing my bank and credit card account statements for the past few months. After that, I should make a list of all the things I spent on during the month, including both periodic and occasional expenses. Download a free copy of my 70/20/10 budget plan in Google Sheets here. Make sure you click the button that says Make a copy, like depicted in the image below in order to make a copy that you can edit.

Next, I should categorize my monthly expenses into fixed and variable ones. Budgeting is not about not spending, but about spending less than I earn. By identifying variable expenses, I can look for opportunities to lower them. I should go through each expense and ask myself if I can reasonably cut it down or out. For example, if I have been spending $30 a month on streaming services I don’t use, I should cancel my subscription and add that money back into my budget. If I have been spending a lot on restaurant meals, I may not want to eliminate dining out altogether, but I can reasonably reduce that expenditure.

I should also decide on a fixed amount that I’ll use every month to pay off my debt. Credit cards typically have high APRs, so stretching myself to increase that payment well past the minimum will help me save on finance fees and accelerate my debt payoff.

By following these steps, I can prepare a 70/20/10 budget that will help me manage my finances better and achieve my financial goals.

Automate and Monitor

To make it easier to manage my budget, I will set up automatic deposits for the 20% of my income that I will use for savings and investing. By doing this, the money will go directly to those accounts from my checking account. I will also set up automatic deposits for the 10% that I will use for extra debt and/or donations. This will leave me with the 70% in my checking account that I will use for my monthly bills and spending.

If I decide to use my credit card for some of my expenses, I will use a card with a zero balance. This way, I will have enough to repay the bill in full by the due date since I have already allotted those expenses as part of my budget. I can also earn credit card rewards that I can use to make fun purchases or get cash back.

To maintain my budget, I will monitor my spending. I will get into the habit of reviewing how much is in my checking account on a daily or weekly basis. This way, I can tweak my spending as needed. By doing this, I will know where all of my money is going, which is the first step towards financial freedom.

Saving and investing 20% of my pay will put me well on my way towards building wealth and having the retirement that I want.

When and How to Adjust Your Budgeting Rules

As with any financial plan, the 70/20/10 budgeting rule may not be a perfect fit for everyone. Fortunately, there are several ways to modify this rule to fit your personal circumstances.

One reason to adjust the 70/20/10 rule is if you live in an area with higher living expenses, such as New York City. In this case, it may be necessary to increase the 70% portion of the rule to accommodate higher rent or housing expenses. On the other hand, if you live in an area with lower living expenses, you may be able to reduce the percentage allocated to necessities.

Another reason to adjust the 70/20/10 rule is if you have high-interest financial obligations. In this case, it may make sense to increase the allocation to debt repayment and reduce what you are saving and investing.

While the 70/20/10 rule provides useful guidelines, it is important to remember that these are not hard and fast rules. If the percentages don’t work for you, consider alternative budgeting rules, such as:

  • 50/30/20: Fifty percent of your income goes to necessities, 30% is for discretionary spending, and 20% goes toward savings and debt repayment.
  • 80/20: Save 20% of your income and spend the remaining 80% on everything else.
  • 60/40: Allocate 60% of your income for fixed expenses like rent or mortgage, and 40% for variable expenses like groceries, entertainment, and travel.
  • 30/30/40: Thirty percent of your income goes toward housing expenses, 30% toward other living costs like food and transportation, and 40% toward discretionary spending and savings.

It is important to try out the 70/20/10 budgeting rule for a few months and make any necessary adjustments. Remember, the best rule is one that is based on these guidelines but amended to fit your personal needs and circumstances. Make it personal.

I also created a monthly budget free downloadable spreadsheet that is easy to use and incorporates the 50/30/20 budgeting rule. You can modify the spreadsheet to fit your budgeting rules.

Frequently Asked Questions

What is the 70 20 10 budget rule?

The 70 20 10 budget rule is a budgeting technique that suggests allocating 70% of your income to living expenses, 20% to savings, and 10% to investments.

How does the 70 20 10 budget work?

The 70 20 10 budget works by dividing your income into three categories: living expenses, savings, and investments. You allocate 70% of your income towards living expenses, 20% towards savings, and 10% towards investments. This budgeting technique helps you prioritize your spending and achieve your financial goals.

What is an example of the 70 20 10 budget rule?

An example of the 70 20 10 budget rule is if you earn $5,000 per month, you would allocate $3,500 (70%) towards living expenses, $1,000 (20%) towards savings, and $500 (10%) towards investments.

What is the difference between 70 20 10 and 50 30 20 budget rules?

The main difference between the 70 20 10 and 50 30 20 budget rules is the allocation of funds towards living expenses. The 50 30 20 budget rule suggests allocating 50% of your income towards living expenses, 30% towards discretionary spending, and 20% towards savings and debt repayment. The 70 20 10 budget rule prioritizes savings and investments over discretionary spending.

Is the 70 20 10 budget rule effective?

The effectiveness of the 70 20 10 budget rule depends on your financial goals and priorities. If you prioritize saving and investing over discretionary spending, the 70 20 10 budget rule can be an effective way to achieve your financial goals.

What are the benefits of using the 70 20 10 budget rule?

The benefits of using the 70 20 10 budget rule include prioritizing savings and investments, reducing debt, achieving financial goals, and living within your means. This budgeting technique helps you make informed financial decisions and achieve financial stability.

Martin Hamilton

Martin Hamilton is the founder of Guiding Cents. Martin is a Writer, Solopreneur, and Financial Researcher. Before starting Guiding Cents, Martin has been involved in Personal Finance as a Mortgage Planning Consultant, Licensed Real Estate Agent, and Real Estate Investor.

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