What is the 70/20/10 budget rule?

A salary for a living does not leave room for savings, investment, debt repayment, or donation to the cause you care about. But the salary-to-salary lifestyle is not always the result of not making enough money.

A kind Willis Towers Watson February 2020 survey It is found that nearly 20% of six-figure earners live a salary-to-salary lifestyle. The lack of a reliable money management strategy is often the culprit.

When you spend money without a plan, it is easy to spend your money quickly without any relief before the next payday.

This is where the 70/20/10 budget method comes in. It breaks the salary-to-salary cycle. 70/20/10 budget is a percentage-based money management method that can help you make room for savings, investment, debt repayment, and donations.

How the 70/20/10 budget rules work

Following the 70/20/10 budget rule, you can divide the actual salary into three parts based on a certain percentage.

70% of your income will be used for monthly bills and daily expenses, 20% for savings and investments, and 10% for debt repayment or donations.

Spend 70% of income on monthly expenses

Through this budget plan, 70% of your net income (income after taxes and other salary deductions) will be used for expenditures, for example:

  • Mortgage payment or rent
  • Public utilities
  • Phone bill
  • Internet bill
  • Car notes
  • car insurance
  • life insurance
  • credit card bill
  • Student loan bill
  • groceries
  • gas
  • dine out
  • entertainment
  • clothing
  • Personal care products
  • nursery
  • Medical expenses
  • Travel expenses
  • gift

You don’t have to specify the percentage you will spend in each budget category. If you want to spend a large portion of this money on travel and dining out, you are completely free to do so (of course, as long as your bills and necessities are protected).

Set aside 20% for savings and investment

Prepare for future success. Following the 70/20/10 rule, you will use 20% of your salary for savings and investment. This may include:

If you have almost no money in your savings account for emergency situations, ideally, you should focus on establishing an emergency fund until you have enough money to cover basic expenses for three to six months.

However, it is also possible to save money for multiple savings goals at the same time.You may feel that retirement still has a long way to go, but it’s best to start as early as possible to take advantage of Compound power.

Use 10% of your take-home salary for debts or donations

The remaining 10% of your income will be used to repay debts or donations (or both). You may want:

  • Pay off credit card debt
  • Pay extra for your student loan
  • Reduce the principal of the mortgage
  • Repay outstanding medical debts
  • Personal loan repayment
  • Tithe to your chapel
  • Donate to the cause you care about
  • Give money to your alma mater

You should use 70% of the income reserved for monthly expenses to pay the minimum bill payment. However, this money is used to make additional payments to help you pay off debts faster.

If you are struggling to pay off multiple debts, please consider using Debt snowball or debt avalanche methodUsing the snowball method, you will start with the debt with the lowest balance. Using the avalanche method, you will focus first on the debt with the highest interest rate.

If you have no debts, use the excess cash for an organization or cause that is important to you. Many budget plans do not specifically consider donations, which makes the 70/20/10 approach unique.

70/20/10 budget example

You do need to do some mathematical calculations to determine how much money to reserve for each of these three main categories, but it is simple.

Just open the calculator app on your phone and multiply your monthly income by 0.7 to figure out how much you can spend each month. Multiply your take-home salary by 0.2 to determine how much you will save, and multiply your income by 0.1 to find the amount used to pay off debts or donations.

For example, if you make $4,000 per month, your monthly budget will look like this:

  • $2,800 will be used to pay for your living expenses
  • 800 USD will be used for savings or investment, and
  • 400 USD will be used for debt or donation

Once you come up with these three amounts, use it in each category in the way that suits you best.

Comparison of 70/20/10 budget and 50/30/20 budget

The 70/20/10 budget is similar to another money management method you may have heard of- 50/30/20 budget. According to the 50/30/20 rule, half of income is used for demand, 30% is used for demand, and 20% is used for savings and other financial goals such as investment or debt repayment.

Both of these budgeting methods are based on percentage budgets. They divide your take-home salary into three main categories. They prioritize saving money and make a positive contribution to your financial future.

However, in terms of expenditure, the 70/20/10 budget rule does not separate demand from demand. It also makes a difference by designating a portion of your salary to donate or donate to others.

The benefits of a 70/20/10 budget

There are some great benefits to using the 70/20/10 budget rule.

This is a very simple method of fund management-similar to the children’s “spend-save-share” money box. Once you divide your take-home wages into three categories, you can spend as much as you want without worrying about ruining your savings goals or debt repayment plan.

Although this budget has a certain structure, it is not very strict or restrictive. You don’t have to zero out how every dollar you spend.

Another benefit of this budgeting style is that it prioritizes your financial future. You will build an emergency fund, invest in retirement, pay off debts and give back to others consistently.

Disadvantages of the 70/20/10 budget

Although this budgeting method has many benefits, it is not suitable for everyone.

If you don’t make enough money to live on your salary, you won’t be able to squeeze out 20% of your savings or 10% of additional debt payments. This budgeting method is only suitable for those who can actually spend 30% of their income on things other than basic living expenses.

Conversely, if you can easily spend less than 70% of your income, and you want to use more of your income to pay off debts or save up to Early retirement, A budget of 70/20/10 may not be the best for you.

It is also important to note that while some people prefer a less strict budget, others will develop better with more detailed guidance on how to spend their money.They may prefer to set limits Interesting money Spend or set specific goals for emergency fund contributions instead of setting aside a broad amount for all savings.

If you are a person who often overspends Impulse buying, You may benefit from a more structured budget, such as Zero-based budget.

5 tips to help you succeed in a 70/20/10 budget

Use this recommendation to truly take advantage of the 70/20/10 budget.

1. Using direct deposit is good for you

Set up a separate bank account for each percentage bucket. One account is used for expenditures, one account is used for savings and investments, and the third account is used for debts and donations. Adjust your direct deposit allocation to comply with the 70/20/10 rule.

2. Automate your billing

Put your bill on the autopay and set the date as soon as you pay. In this way, before you start buying takeaway or new shoes, your monthly financial obligations will be guaranteed.

3. Track your expenses

Since there is no further guidance on how you should spend 70% of your income, it is best to keep track of your expenditures to understand where your funds are going. Check your expenses regularly to make sure you have a good balance between needs and wants.A kind Budget app Can help you easily track expenses.use Cash envelope Helps ensure that you don’t overspend in certain categories.

4. Adjust the percentage to best suit your situation

If you want to save even more, you may find it worth setting a budget of 65/25/10. If you are paying for childcare for multiple children, you may need to subdivide 80/10/10.

5. Separate 70% of the funds when making budgets with partners

After you use your gross income to pay bills and other necessities, divide the remaining 70% equally with your significant other. It can be a 50/50 split, or you can choose to build it based on the income of each partner.Regularly scheduled Budget meeting Decide together what to do with the 20% designated for savings and 10% for debts or donations.

Final thoughts

If you want to put your funds aside to improve your financial future, but don’t want to be too strict with your spending, then a 70/20/10 budget is a good way to manage your funds.

By using a specific percentage to allocate your money, you are free to spend 70% of your salary without worrying about whether you have contributed enough to the emergency fund or reduced debt.

This type of fund management is also very suitable for those who are keen on charity and want to share part of their income with others.

In general, the 70/20/10 method is a reliable budget plan that can easily help you break the salary-to-salary cycle to achieve your financial goals.

Nicole Dow is the senior writer of The Penny Hoarder.

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About the Author: Agnes Zang