The 70/20/10 budget rule helps 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, many 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 great target, but for some people, it’s more realistic to gradually work up to that level over a few months.
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.
Where the 70/20/10 Budget Shines
A few things stand out as positives when you start to examine the 70/20/10 budget:
- The 70/30/20 budget’s greatest strength is its simplicity. There are no complex categories or intricate tracking systems to manage.
- Unlike the 50/30/20 budget, the 70/30/20 approach offers a more realistic scenario for those in high cost-of-living areas.
- The 70/30/20 budget serves as an excellent baseline for financial planning, especially for people who are new to budgeting or who are looking to reassess their financial habits. For example, if you’re spending way more than 70% on living expenses, it becomes obvious that your savings will have to be reduced.
70/20/10 Budget Shortcomings
While the 70/20/10 budget provides a simple framework, it’s important to recognize its limitations.
Broad Living Expenses Category
The 70% allocation for living expenses combines needs and wants, which may lead to overspending in one of those areas.
While it might seem like a generous allowance, combining necessities with discretionary spending can blur the lines and make it easier to overspend. Unlike the 50/30/20 budget, which dedicates a specific portion to wants, the 70/20/10 approach has more gray area, which isn’t always a good thing.
Oversimplification of Financial Goals
The rigid percentages of the 70/20/10 budget may not account for varying financial priorities at different life stages or in specific financial situations.
This oversimplification can be particularly problematic for people who want to pursue a path outside of traditional work until they reach retirement age.
For example, consider someone with an advanced degree with a high-income job but who also has significant student and credit card debt. In this case, the standard 20% allocation for savings and debt repayment might not be sufficient.
Let’s say this person earns $150,000 annually after taxes. These guidelines would then instruct them to live on:
- 70% ($105,000) for living expenses.
- 20% ($30,000) for savings and debt repayment.
- 10% ($15,000) for additional savings and donations.
While $30,000 and another $15,000 for debt repayment and savings is substantial, this approach may not be aggressive enough for someone carrying $200,000 in student loans and excessive credit card debt.
A Tool for Evaluation, Not a Strict Rule
Rigidly adhering to any budgeting rule, including this one, can overlook unique financial circumstances and goals.
That’s why the 70/20/10 budget rule is most valuable as a framework for evaluating your current spending habits and identifying areas for improvement rather than a strict guideline to follow rigidly.
For example, here’s how you’d use this rule to evaluate housing costs:
- Input your potential rent or mortgage into the 70/20/10 framework.
- Review how this fits your other living expenses within the 70% category.
- Assess whether the remaining 30% covers your savings, debt repayment, and charitable giving goals.
This can serve as some very valuable feedback to determine if the maximum monthly rent a mortgage broker says you can afford is actually affordable.
But ultimately, a successful budget is tailored to the individual. While the 70/20/10 budget can serve as a starting point, it’s important to adapt it to create a financial plan that truly works for you.
Alternative Budgeting Methods to the 70/20/10 Budget
There are many ways you can budget. The choice of whether to stick with a budgeting plan (or create your own) comes down to your situation in life.
Here’s some guidance on the popular budgeting types available today.
Take our budgeting quiz to see what the optimal budgeting method is for you.
- The 50/30/20 budget rule. This popular budgeting method divides after-tax income into three main categories: 50% for necessities, 30% for wants, and 20% for savings and debt repayment. It’s best if you want to allow for more discretionary spending flexibility while also balancing short-term and long-term financial goals.
- Dave Ramsey’s recommended household budget percentages. Ramsey suggests a more detailed budgeting approach, with 12 categories. His method allocates specific percentages to various expenses, such as 25% for housing, 15% for saving, 12% for food, and 10% for giving. This approach offers more granular control over spending but may be more difficult to implement and manage.
- The reverse budgeting method. Also known as “paying yourself first,” this approach prioritizes savings and financial goals before allocating money to expenses. You determine your financial goals, automate savings towards them, and then budget the remaining money for living expenses. This method helps ensure that saving becomes a priority rather than an afterthought. This method is more hands-off and ideal for someone who constantly spends less than they earn (and just wants to ensure their goals are being hit).
- The cash envelope system. This budgeting technique uses cash for various spending categories in separate envelopes. It’s a hands-on approach that can help control overspending by providing a tangible limit to each budget category. It’s ideal for someone who has overspent using credit cards in the past.
- Zero-based budgeting. In this method, you allocate every dollar of your income to a specific purpose: expenses, savings, or debt repayment. The goal is to have your income minus your allocated money equal zero, ensuring that every dollar has a job. This is ideal for those looking to cut their expenses drastically but prefer to spend via credit/debit cards.
Final Thoughts
Spending money to optimize your satisfaction is more of an art than a science. The 70/20/10 budget method is an excellent starting point for evaluating your financial situation.
If your current allocations are far off from this guideline, working towards fitting your monthly expenses into these categories can provide valuable clarity in the short term.
However, recognize that this budget isn’t a one-size-fits-all solution for every stage of life.
As you progress through different phases – from starting your career to raising a family or preparing for retirement – your financial priorities and circumstances will inevitably shift. Being truly “good with money” involves the flexibility to adapt your financial plan as your life evolves.
So, use the 70/20/10 budget as a helpful framework, but don’t be afraid to deviate from it when necessary. The key is always to balance your current needs, future goals, and personal values.
