70-20-10 Budgeting Rule [The Official Guide]

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Budgeting can be stressful if you follow the wrong methodology.

And we get it. Sometimes it’s just a matter of trial and error finding what works. However, it may be worthwhile to consider the 70-20-10 budget method due to its versatility.

The great thing about this method is that it works for both low- and high-income earners.

According to a study conducted by PYMNTS and LendingClub, 125 million out of 258 million adults in America live paycheck to paycheck.

Furthermore, 70% of millennials are living paycheck to paycheck. No other generation has ever had such a huge portion of its populace living this way.

A lack of money isn’t always due to an inability to earn more. It could be due to a lack of proper money management.

Table of Contents

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What is the 70-20-10 budgeting rule?

The 70-20-10 budgeting rule teaches you to divide your income into three categories as follows:

Spend 70% of your money
Save 20% of your money
Pay off debt with 10% of your money

What income should I base the 70-20-10 budgeting rule on?

You base the budget on your net take-home income, not gross income. Look at the amount you take into your bank account every paycheck. That’s the number to use.

This assumes that you’re withholding the correct amount if you’ve got a W-2 job. If you owe taxes every year when you file, consider that into the final number.

If you’re a 1099-contractor, freelancer, etc., the idea is the same. You would need to do a little more calculating to get the number, and it’s a little trickier since you’ve got to subtract the taxes you’ll need to pay during tax season. Find a tax calculator and get an idea of how much you will owe in taxes.

As long as your number is close to your actual income minus any upcoming tax liabilities, you will be just fine. You can always make minute adjustments as you get a better idea of your finances over time.

How does the 70-20-10 budgeting rule work?

The 70% category of the 70-20-10 budgeting rule

The 70% spend category of the budget includes all expenses, which means both unavoidable overhead expenses and discretionary spending.

Examples of unavoidable overhead expenses in the 70-20-10 budget include:

mortgage payments
rent
utilities
groceries
car payments
gas
insurance

Examples of discretionary spending in the 70-20-10 budget include:

shopping
dining out
entertainment
traveling

Know that figuring out this 70% category is a fundamental skill in itself. And you will get good at it. Don’t fret if it takes you a few months to get the hang of it.

The 20% category of the 70-20-10 budgeting rule

This is the savings category. Saving 20% is relatively straightforward, and this can either be:

An emergency fund
A savings account at your local bank

The idea is to try and not touch this money. Ideally, the money should be kept in some form of money-yielding account. As your savings accumulate year over year, you can then start to move some money around.

One good way to approach it would be to have a 6-month emergency fund. The idea is to force yourself to save in one way or another.

Additionally, if you’ve already covered your 6-month emergency fund, you could try your hand at investing the money. Feel free to put it in some broad-based index or bond funds/ETFs.

Or if you feel more comfortable with someone else handling it for you, consider some Robo-investing apps such as Betterment or Wealthfront. Their fees are very reasonable and they’ll do all the heavy lifting for you.

The 10% category of the 70-20-10 budgeting rule

Lastly, we arrive at the debt category. And it’s simple. If you have debt, pay off whatever you can with the last 10% of your income.

If you’re one of the lucky ones who do not or no longer have debt, you can do whatever you want with this 10%.

Feel free to give to a charity you’re passionate about, or invest in some other way if you wish. It’s really a catch-all category if you don’t have debt.

For example, if you have kids, you could start getting ahead by opening a college fund for them. Or, if you feel up to it, challenge yourself to find investments that will maximize capital growth instead of a traditional savings college fund.

Another great option for this last category is to funnel the money into the spending or savings category as you see fit.

Perhaps you miscalculated and underestimated the amount needed for spending. Instead of reaching into your emergency fund, go ahead and use some money from this category.

It’s flexible, and it gives you a nice 10% margin in case of mistakes or miscalculations, especially when you first embark on your budgeting journey.

Why does the 70-20-10 rule of money work so well?

The 70-20-10 budgeting rule works so well because it satisfies multiple rules of money. These include:

The 3 rules of money
The golden rule of money

If you don’t know what these are, no worries! We’ll explain.

What are the 3 principle rules of money?

The three rules of money are:

To differentiate between needs and wants
To live within your means
To not take on any debt if possible

Does the 70-20-10 budgeting method fulfill all of these? You bet!

Differentiating between needs and wants is a core skill that you’ll need in order to successfully implement the 70-20-10 method. And it also teaches you to live within your means because by planning out your budget, you’re pre-determining how much you can spend on your needs and wants.

As for the last rule, whether or not you have debt, the 70-20-10 aims to better your situation either way.

If you don’t have debt, great! But if you’ve already violated that last rule, the 70-20-10 budgeting rule dictates that you should at the very least be paying off your debt with 10% of your income.

That ensures that you have the best chance of getting out of debt in a timely manner.

What is the golden rule of money?

The golden rule of money is to spend only what you have.

Yup, it’s that simple. The 70-20-10 budgeting rule follows this golden rule because as mentioned above, you’re pre-determining what you’re able to spend on a monthly basis.

If you follow this rule, you’re as good as gold.

To maximize what you have, check out the zero-based budget, which can be applied together with the 70-20-10 budget.

Pros and Cons of the 70-20-10 budgeting rule: The Pros

Pros

The most attractive feature of the 70-20-10 budgeting method is that it’s designed to work across most income levels.

It minimizes discrimination among different earning levels since it allows you to spend a generous portion of your income if need be.

It provides peace of mind rather than stress when you allow a larger allocation to be spent instead of restricting the spending and worrying about not having enough every month.

As you grow in your financial journey, you may modify the percentages as you see fit.

Pros and Cons of the 70-20-10 budgeting rule: The Cons

Cons

When you compare the 70-20-10 budgeting rule to other budgeting rules such as the 50-30-20 and the 80-20 methods, it’s a bit more complicated and nuanced than the others.

For example, if you’re looking to use the 50-30-10 budgeting rule, you’re simply allocating 50% to needs, 30% to wants, and the rest to savings. And that’s all there is to it. You simply need to be able to differentiate between needs and wants.

Even simpler is the 80-20 budgeting rule, where you simply take 20% of your income and put it towards savings. You do whatever you want with the rest of the 80% of your income.

However, in the 70-20-10 budgeting method, you allocate 70% to the spending category. But within that spending category are subdivisions of overhead and discretionary spending, which is a different way of expressing needs and wants.

Within the 10% debt category, it’s fairly straightforward unless you don’t have debt. Then it carries over to whatever you want it to be, including spending or savings. If you decide to put the money into one of the latter two categories, there’s some overlap to be considered.

Example of the 70-20-10 budgeting rule in action

Let’s assume a $45,000 salary

Specifically, we’re assuming a $45,000 household W-2 income for a married couple filing jointly.

Punching these numbers into a tax calculator, take-home income for the year will come out to approximately $38,996.

Most W-2 employees get paid bi-weekly, which is 26 times a year. That comes out to around $1,500 each paycheck every two weeks.

That’s a total of $3,000 going into your bank account every month.

The Breakdown

70% equals $2,100
20% equals $600
10% equals $300

70% category in the 70-20-10 budgeting rule

We all know average rent stats in the U.S. mean little since it ridiculously varies depending on the area. But let’s say for simplicity’s sake that rent is $1,100 per month. That leaves $1,000 left to spend on other unavoidable overhead as well as discretionary spending.

If you manage your money well for the month, you’ll be fine.

However, if you find that you’re struggling to get this category to work in the first month, take some time to take a deeper dive into your spending and see if there are possible areas to save on.

Changing up your finances for the better is all part of a numbers game, and you’ll improve the more you practice.

20% category in the 70-20-10 budgeting rule

If you already have a savings account or emergency fund, simply transfer $600 into the account every month.

If you don’t have a savings account, open one that best suits your needs.

10% category in the 70-20-10 budgeting rule

Let’s dive into a scenario where you’ve overspent in the spending category by $200. That is, you’ve spent a total of $2,300 for the month in this category.

In this case, I’d allow some funneling from the 10% category into your spending category. That’s why it’s there. Eventually, the goal is not to have to do so.

So now we’re left with $100. Since we’re starting out, I’d feel safer transferring the amount into my emergency fund.

The recommended emergency fund amount is 6 months’ worth of expenses. That means I’ll need to aim for 6 times $2,100, which comes out to $12,600.

The beauty of it all is that it’s up to you. Whatever you choose to do with the 10%, just be ok with it.

How can I cut down on the amount of spending in the 70-20-10 budget?

In this day and age, there are plenty of options to help you save money in various ways. Let’s take a look at some of them:

Bill-cutting apps
Cashback apps
The 1% rule for guiding large purchases
The 30-day spending rule

Let’s dive into each of these in a bit more detail down below.

Bill-cutting apps

Apps like Hiatus, Trim, and Rocket Money can help you cut down your bills.

The way it works is you give the app permission to negotiate your bills on your behalf. In return, you’ll pay them a fee that is generally a percentage of the savings they are able to net you as a result of the negotiations process.

The fees vary with each company, but the good part is that if negotiations fail and there are no savings, you don’t have to pay a single dime for it.

Cashback apps

There are plenty of cashback programs to partake in, and one of these is the Slide app. With this app, you get a cash back return of 4-5% on each purchase in qualifying stores. These cash back returns can be stacked on top of your usual credit card cash back rewards.

They are compatible with over 250 stores, so check them out to see if this cash back app may be a good fit for you.

The 1% rule for guiding large purchases

In a nutshell, whenever you’re about to purchase something you don’t need and it costs over 1% of your annual gross income, don’t buy it right away.

Instead, you should wait at least one day before buying and seriously run through the questions below:

Do I really need this?
Can I afford it?
Will I actually use it?
Will I regret it?

If you still feel good about buying the item after you’ve considered these questions, then that’s your cue to go ahead and make the purchase. However, if your mind is hesitating on some legitimate reasons to not make the purchase, then you should put the wallet away.

The 24-hour wait acts as a buffer period to let the cloudy dopamine rush diffuse and allow you to make clearer judgments.

The 30-day spending rule

The 30-day spending rule is a straightforward, easy-to-follow technique for reducing impulse buys and increasing your savings.

Applying the rule is quite simple: Delay your purchase for 30 days.

Anytime you’re thinking of making a purchase or simply buying something, walk out of the store or close your browser.

It’s kind of like saying to yourself, “Not yet. Not until I get my ducks in order.”

After the 30 days have passed, go ahead and buy it if you still want it. At the very least, you’ll know you’ve made a more informed decision.

Track your spending to make sure you are staying on top of the budget

Once you have set your budget, it is very important to stay on top of it. This can be done in a number of different ways.

Excel Sheet
Physical Budget Planner
Online Tracker (check out YNAB vs Mint)

Whatever method you choose, it is important that you choose something that will be best for you.

Are there alternatives to the 70-20-10 budgeting rule?

Absolutely! The great thing about personal finance is that it’s, well… personal. Check out a couple of the other great budgeting methods below:

The 50-30-20 budgeting rule
The 80-20 budgeting rule

What is the 50-30-20 budget rule?

The 50-30-20 budgeting rule is a method popularized by Elizabeth Warren, and it’s quite simple.

You allocate your monthly income into three buckets:

Needs (50%)
Wants (30%)
Savings (20%)

Note that it is slightly different than the 70-20-10 budgeting rule in its use of categories. Saving money is a big focus of the 50-30-20 rule.

What is the 80-20 budget rule?

The 80-20 budgeting rule might be the simplest budgeting rule next to not having any budgeting rules at all.

To implement this 80-20 rule, you simply take 20% of your paycheck and put it towards savings.

As for the rest of the 80%? Do whatever you want with it. Seriously.

Just make sure you cover everything you need to live though, for obvious reasons.

Conclusion

Regardless of your income level, the 70-20-10 budgeting method can work wonders for just about anyone.

To summarize, the 70-20-10 budgeting rule dictates that you:

Allocate 70% of your monthly take-home income toward spending
Allocate 20% of your monthly take-home income toward savings
Allocate 10% of your monthly take-home income toward debt, if applicable

By implementing the 70-20-10 budgeting rule, you’ll be taking an all too important step towards securing your financial future and well-being.

What are you waiting for?

What is a good budget plan?

A good budget plan is any budgeting plan that you can see yourself sticking with. Don’t fret too much over which budgeting method to go with. Just adopt the one you like the most.

Believe it or not, over 80% of households in the U.S. do not budget at all. So if you’re budgeting, you’re already getting ahead financially compared to the rest of the country.

What percentage of income should be left after bills?

If you’re using the 70-20-10 budgeting rule, then the percentage of income that is left after bills should be 30%, since all of your bills should be paid off within the 70% spending category.

How do you budget for low income?

To budget for low income, use either the 70-20-10 or 50-30-20 rule of budgeting. The reason why these work great for low-income earners is that it doesn’t require the user to restrict their spending down to a ridiculous amount. You’re able to potentially spend around 80% of your income each month, and hopefully save the rest of the 20%, whether that be as an emergency fund or savings account.

What is the most important rule to investing?

The most important rule to investing is to use a broad-based index fund for your capital growth. And never try to time the market. Time in the market is more important than anything else.

What does the Rule of 72 refer to?

The Rule of 72, otherwise known as Einstein’s Rule of 72, is a straightforward way to calculate the time it will take for a total amount of invested money to double in value based on its fixed annual rate of interest.

The stock market, and specifically the index, provide returns of roughly 10% a year on average. If you simply place your money in an index fund and let it run for 7 years, there’s a very good chance that your money will double or come quite close to it.

What is the 5% rule in money?

The 5% rule in money states that you should never invest more than 5% of your entire capital into one asset, especially into individual high-risk stocks.

Does this apply to broad-based index funds or ETFs? No, because those aren’t individual assets.

Take VOO for example, which is a Vanguard ETF that tracks the S&P 500. In that ETF alone are 500 individual stocks, so whatever capital you’re putting in it is spread over those 500 stocks.

How do I stop living paycheck to paycheck?

There’s no one single answer for this, but as a principal, you have to be living within your means and saving a percentage of your income every month. If you do this successfully, by definition, you’ll have a surplus that adds up every month, and eventually, at some point, you won’t be living paycheck to paycheck.

Of course, unexpected circumstances can single-handedly derail your progress, which is why we recommend six months of emergency funds when at all possible.