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New to budgeting? Looking for a quick and easy budgeting method? Is the current budgeting method not working out for you?
You’re in the right place.
The 70 20 10 budget rule is a simple budgeting method for organizing your finances. All you need to do is split your income into three categories, and you’re all set.
Is this exactly what you’re looking for? Fantastic.
Let’s dive right in.
What Is the 70 20 10 Budget Rule
It is a clear and easy-to-follow plan for organizing your finances.
This method breaks down your take-home pay into three categories: Needs and Wants, Savings, and Debt (or donations/savings). By sorting your take-home pay this way, you get a clearer picture of where your money’s headed and can track how well you’re doing in reaching your financial goals.
70% for Needs and Wants
This portion covers all your daily expenses. It includes everything from your rent or mortgage to groceries, transportation, any debts (minimum payments), entertainment, and dining out.
20% for Savings
This 20% of your income goes toward your savings, emergency fund, child’s education, retirement savings, investments, etc.
But, before you begin, think about what you want to achieve and write it all down.
10% for Additional Debt Repayments (Or Donations/Savings)
It might be the smallest part, but it’s vital.
This portion is allocated toward paying down any debts you have, like car loans, student loans, or credit card debts. Or, if you don’t have debts, you can give your 10% toward donations or one of your money goals.
5 Steps to Setting up Your 70 20 10 Budget
Now, let’s walk through the 5 simple steps to setting up your 70 20 10 budget.
Step 1: Know Your Take-home Pay
First, let’s figure out what you’re bringing home.
Add up your main job’s paycheck, any side gig, investment earnings, etc – all after taxes.
Let’s say your take-home pay is $4,000 per month.
Step 2: Budgeting for Daily Life – 70%
Now, take 70% of your $4,000, which is $2,800, and this amount covers all your needs and wants.
And here’s a Tip:
As your Needs and Wants are in the same pool, it’s a good idea to sort them out. And if you want to be more detailed, split your expenses into two types: Fixed and Variable.
- Fixed Expenses: These expenses don’t change from month to month. For example, your rental or mortgage, insurance, car payments, subscriptions, etc.
- Variable Expenses: These are expenses that fluctuate. They include eating out, gas or transportation, groceries, utility bills, etc.
By categorizing your spending this way, you’ll get a clearer picture of where your money’s going and find spots to save a bit more.
Step 3: Saving for Tomorrow – 20%
Next comes saving: 20% or $800 in this example.
Here are some goals you should strive for:
- Emergency Fund (3-6 months of living expenses)
- Saving for a Home
- Investments (e.g., stocks, index funds, etc.)
- Retirement Savings (e.g., 401(k) plan, IRA, etc.)
- Other Financial Goals (e.g., starting a business, furthering your education, etc.)
Regardless of how big or small this 20% may be in your present situation, the choices you make today and the consistency from this point on will make a significant difference over time.
So, never be disheartened, never stop, and keep going.
Step 4: Pay Off Debts – 10%
Next, 10% of your income, so $400 here, is dedicated to crushing those debts.
Got student loans, credit card balances, or a car loan? Here’s where you strike hard and crush them.
If you’re one of the fortunate ones without debts, that’s fantastic! You can use this 10% to give to a charity or cause you’re passionate about. It’s always good to help others whenever you can.
Alternatively, you can put it all into your savings, investments, or other financial goals.
Whether you’re reducing your debt or accelerating toward your financial goals, consistency will give you the results you want.
Step 5: Monitor and Review
Lastly, the most crucial part of budgeting is monitoring and reviewing your budget.
Here’s how:
- Regular Reviews: Set a weekly or monthly budget review. This will help you stay on track with the 70 20 10 budget plan.
- Use Budgeting Apps: Make full use of available budgeting apps. They make tracking much easier and save you time.
- Adapt to Changes: Life is full of surprises. More money? Boost your savings or wipe out your debts. Tight on cash this month? Look into your spending and cut down your expenses.
- Stay Goal-Oriented: Always keep your financial goals in focus.
Staying on top of your budget helps you maintain control of your finances. You become more aware of where your money is going, which helps you keep your spending under control and stay on track toward your money goals.
So, keep an eye on that budget!
Advantages and Disadvantages of the 70 20 10 Budget Rule
The 70 20 10 budget rule, like any other type of personal budget, has its pros and cons.
Advantages:
- Simplicity: Easy to understand and implement, even for beginners.
- Promotes Structure and Discipline: It helps establish a structure in your finances and develop good saving habits and debt repayment.
Disadvantages:
- Not For Everyone: For someone living in an area with high living costs or living paycheck to paycheck, the 70% allocated for daily expenses may not be practical.
- May Be Insufficient for Large Debts: If you have large high-interest debts, allocating just 10% (or $400 in our example) might not be sufficient. The interest incurred on these debts can accumulate quickly and negate all your efforts.
- Oversimplification: This method lumps both Needs and Wants together. Without a detailed breakdown, you will likely spend on things you think you need but are actually non-essential.
While the 70 20 10 rule provides a simple and structured way of managing your finances, it is still important to ensure it fits your situation.
Comparing 70 20 10 Budget with Other Budgeting Methods
Now, let’s look at how the 70 20 10 budget stacks up against other popular methods:
The 50 30 20 Rule
This one is more detailed than the 70 20 10 budget.
You allocate half of your income to Needs, 30% to Wants, and the remaining 20% to savings, investments, or additional debt repayments. It’s clear-cut, dividing your expenses more distinctly between Needs and Wants.
If you find that spending 70% on both needs and wants is still a bit tight for you, the 50 30 20 budget gives you more spending (80%).
The Envelope System
Do you prefer the feel of cash in your hand?
The envelope system, also known as cash stuffing, will suit you. You split your take-home pay into various envelopes assigned for different expenses, such as groceries, gas, insurance, savings, rent, utility bills, etc.
It’s a very hands-on budgeting method and ideal for individuals who want to know where every dollar goes.
So, What’s Different?
- The 70 20 10 budget rule is broader. It doesn’t separate your needs from your wants.
- The 50 30 20 budget rule gives you more clarity (Needs and Wants are separated). It also allocates a slightly larger portion of your income to handle your needs and wants compared to the 70 20 10 budget.
- The Envelope System forces you to use cash only for all your expenses. (So, no credit card spending, no debts piling up.)
What’s Right for You?
- If you’re into simplicity, go with the 70 20 10 budget.
- If you like breaking down your expenses more or need more for your Needs and Wants, try the 50 30 20 budget.
- If you want to see where every dollar goes and like using physical cash, the envelope system could be your thing.
Each method works differently and has advantages and disadvantages. So, it all comes down to finding what best suits your current financial situation and personality.
Take Control with the 70 20 10 Budget Rule
You’ve found a quick and simplistic way to keep your finances in order.
With the 70 20 10 budget rule, you will take charge of your spending, boost your savings, and reduce your financial stress. So, start today: organize your finances and watch your goals come within reach.
No more delays, no more doubts.
Let’s put this budgeting plan into action and march your way to a more secure and fulfilling financial life.
