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When it comes to managing your money, it’s easy to feel overwhelmed by all the different budgeting methods out there. But don’t worry, there’s a simple solution that can help you get a handle on your finances while still living a little.
Enter the 70-20-10 budget rule. This method is straightforward, flexible, and works well for people who want to keep things simple but still make sure they’re setting money aside for the future.
In this article, we’ll break down exactly what the 70-20-10 budget rule is, how it works, and how you can apply it to your own finances to build a healthier financial life.
What is the 70-20-10 Budget Rule?
The 70-20-10 budget rule is a basic approach to managing your finances that splits your after-tax income into three main categories:
- 70% for living expenses and lifestyle
- 20% for savings and investments
- 10% for debt repayment or charitable donations
This method is easy to follow, and it ensures that you’re not only covering your basic needs but also setting aside money for your future and giving back to others.
Let’s take a closer look at each of these categories to see how you can make the most of this simple but effective budgeting method.
Breakdown of the 70-20-10 Budget Rule
1. 70% for Living Expenses and Lifestyle
The first part of the 70-20-10 rule is allocating 70% of your income to your daily living expenses and lifestyle. This includes all the essential and non-essential items that you need or want to live a comfortable life.
What Does This Include?
- Housing: Rent, mortgage payments, utilities (water, electricity, gas), and internet.
- Transportation: Car payments, gas, public transportation costs, or ride-sharing services.
- Food: Groceries, dining out, and take-out.
- Health: Medical expenses like health insurance, prescriptions, or doctor visits.
- Personal Expenses: Clothing, toiletries, and other personal items.
- Entertainment: Movies, music, streaming services, and other leisure activities.
This is the money you use for everything that keeps you going from day to day, including the things that make life enjoyable. The key here is to live within your means.
While it’s tempting to overspend on entertainment or dining out, staying within this 70% cap will help you avoid financial stress while still allowing you to enjoy life.
Tips for Managing Your 70%:
- Track your spending: Keep an eye on where your money is going. Apps like Mint or YNAB (You Need a Budget) can help you categorize and track your expenses.
- Look for areas to cut back: If you find that you’re overspending in certain areas (like entertainment or dining out), look for ways to reduce those costs. For example, consider cooking at home more often or using public transportation instead of driving.
- Prioritize needs over wants: It’s okay to indulge, but try to balance your needs and wants to stay within the 70% range.
2. 20% for Savings and Investments
The next part of the 70-20-10 rule is allocating 20% of your income to savings and investments. This is the money that will help secure your financial future and give you peace of mind in case of emergencies.
What Does This Include?
- Emergency Fund: Saving for unexpected costs, like car repairs, medical bills, or home maintenance.
- Retirement Savings: Contributing to your 401(k), IRA, or other retirement plans.
- Investing: Buying stocks, bonds, or mutual funds to grow your wealth over time.
- Short-Term Savings Goals: Saving for things like a vacation, a new gadget, or a down payment on a house.
Saving 20% of your income might sound like a lot, but remember that it’s for your future. The earlier you start saving, the more time your money has to grow, thanks to the magic of compound interest.
If you can get into the habit of setting aside money for savings and investments, you’ll be in a much better position down the road.
Tips for Saving and Investing:
- Automate your savings: Set up automatic transfers to your savings account or investment fund so you’re not tempted to spend that money. Many employers also offer automatic 401(k) deductions.
- Start small if needed: If 20% feels too much to start with, begin with a smaller percentage (say 10%) and work your way up over time.
- Invest early: Even small contributions to retirement accounts or brokerage accounts can grow significantly over time. Don’t wait to start investing—get started as soon as you can!
3. 10% for Debt Repayment or Charitable Donations
The last part of the 70-20-10 rule is allocating 10% of your income to either debt repayment or charitable donations. This portion of the budget is meant to help you either get out of debt or give back to causes that matter to you.
What Does This Include?
- Debt Repayment: Paying off credit cards, student loans, personal loans, or other types of debt.
- Charitable Donations: Giving to a cause or organization that you care about, whether it’s a charity, church, or non-profit group.
If you’re dealing with high-interest debt (like credit cards), it’s generally a good idea to focus on paying it off as quickly as possible. On the other hand, if you have your debt under control, you can use this 10% to support causes that make a difference in your community or the world.
Tips for Debt Repayment or Giving:
- Focus on high-interest debt first: If you have multiple debts, prioritize paying off the ones with the highest interest rates. This will save you money in the long run.
- Create a debt repayment plan: List out your debts and make a clear plan for how you’ll pay them off. This can include the debt snowball method (starting with the smallest debt) or the debt avalanche method (starting with the highest interest debt).
- Give according to your ability: If you’re in a tough financial situation, you can adjust your charitable giving temporarily. Even small donations can make a big difference, and you can always increase your giving once you’re in a more comfortable financial position.
How to Apply the 70-20-10 Rule to Your Finances
Step 1: Calculate Your After-Tax Income
The first step in using the 70-20-10 rule is to calculate your after-tax income. This is the amount of money you actually take home after taxes have been deducted from your paycheck. This is the income you’ll be budgeting with.
For example:
- If your monthly salary is $3,500, but after taxes you take home $2,800, your budget will be based on the $2,800.
Step 2: Allocate the 70%, 20%, and 10%
Once you know your after-tax income, break it down according to the 70-20-10 rule:
- 70% for living expenses: $2,800 × 70% = $1,960
- 20% for savings and investments: $2,800 × 20% = $560
- 10% for debt repayment or charitable donations: $2,800 × 10% = $280
This gives you a clear picture of how much you can spend in each category. The beauty of this rule is that it’s simple, and you don’t need to track every little expense in a complicated spreadsheet.
Once you know the amounts for each category, you can allocate your money accordingly.
Step 3: Review and Adjust Your Budget Regularly
Life happens, and your financial situation might change. Maybe you get a raise, lose a job, or have unexpected expenses. It’s important to review your budget regularly to make sure it still works for you.
If you’re in a season where you need to focus on paying off debt quickly, you can adjust the 10% to allocate more to debt repayment. Similarly, if you want to focus on saving for a big goal, you can adjust the savings category to allocate more than 20%. The key is to stay flexible and adjust as needed.
Benefits of the 70-20-10 Budget Rule
Simplicity
The biggest advantage of the 70-20-10 rule is its simplicity. You don’t have to track every little expense—just focus on the broad categories, and you’re good to go.
Balanced Financial Priorities
This rule encourages a well-rounded approach to managing your money. It ensures that you’re covering all the bases: living your life now, planning for the future, and reducing debt or supporting causes you care about.
Flexibility
The 70-20-10 rule is adaptable. You can adjust the percentages to fit your needs. For instance, if you’re aggressively paying off debt, you might allocate 15% to debt repayment instead of 10%. As long as you’re sticking to the spirit of the rule—balancing living, saving, and giving—it will work for you.
Conclusion: The 70-20-10 Rule for a Balanced Financial Life
The 70-20-10 budget rule is a great starting point for anyone looking to get their finances on track. It’s simple, flexible, and helps you prioritize the things that matter most: living well today, saving for tomorrow, and paying down debt or giving back.
Whether you’re new to budgeting or just looking for a simpler way to manage your money, this rule can help you create a balanced, stress-free financial life. So why not give it a try? With a little discipline and consistency, you’ll be well on your way to financial freedom.
