What is the 70-20-10 budgeting rule?
- The 70-20-10 budget is a guideline that simplifies the allocation of your income into spending, saving, and giving.
- The 70-20-10 budget is ideal for people who are just starting to learn how to manage their income.
- One of the drawbacks of the 70-20-10 budget is that it does not separate discretionary spending from the cost of living.
- Read more stories from Personal Finance Insider.
Budgeting is a great way to control your income. But with seemingly endless ways to divide your money, it can be helpful to follow one of the many budget guidelines out there. “It doesn’t have to be a million categories and take a long time. There are ways to make this actually digestible and easier,” says Dani Pascarella, CFP® Professional and Founder of OneEleven Financial.
A newer plan among these guidelines is the 70-20-10 budget, which can serve as the basis for a more detailed budget down the line. Here’s everything you need to know to determine if this plan is right for you.
What is the 70-20-10 budget?
Like other budget guidelines such as the 50-30-20 rule, the 70-20-10 budget offers a loose budget plan that simplifies what can be a complicated process. Budget guideline 70-20-10 divides your after-tax income into three categories: monthly expenses, savings, debt repayment, and donations.
Use 70% of your income on wants and needs
Unlike most budgets, which separate your cost of living and discretionary spending into two different categories, the 70-20-10 budget condenses the two into one category. Because there’s no line separating your needs from your wants, it can be helpful to figure out what percentage of your expenses are fixed, like rent or utilities, and figure out what percentage of your spending money. is still available.
Set aside 20% for savings and investments
The 70-20-10 budget allows you to spend 20% of your income on investments or savings. You can direct your earnings to an emergency fund if you don’t already have one, or take advantage of compound interest through a high-yield checking account. Not only does this ensure that you will have money when you need it, but you will have more income overall.
Keep in mind that you may already be saving pre-tax income in retirement vehicles such as a 401(k) match, in which case you may not need to save as much of the income that reaches your bank account.
Use the remaining 10% for debt repayment or donations
The last 10% of your budget goes to paying off debts or giving money. When it comes to debts, this category is for debts that are not immediately due, such as extra payments on student loans or medical debts. On the other hand, minimum payments are usually part of your monthly expenses, like credit card debt payments or car loan payments.
The donation aspect of the 70-20-10 budgeting rule is what makes this guideline unique, as most budgeting guidelines do not explicitly include donations in the budget. This includes donations to charities or causes you believe in or donations to places of worship or alma maters. It can also mean supporting your parents through retirement. A 2018 Pew Research Center study found that 14% of adults living in someone else’s home are a relative of the household head.
How to know if the 70-20-10 budget is right for you
Pascarella says the 70-20-10 budget is primarily for people who are just getting started with budgeting because of its simplicity. This is especially important when the only way to learn how to budget is to actively seek it out.
“Most schools don’t teach personal finance, so most people are in a situation where they feel like everyone around [them] knows this stuff, and [they] feel very, very silly,” says Pascarella. Ideally, you should develop a more sophisticated budget plan as you go along, but “by establishing these simple rules, it’s really easy for people to get it when ‘they start and they feel like they have something to do, that’s a good place to start,’ she adds.
The 70-20-10 budget, with its designated allowance for donations, is also attractive to socially responsible individuals. However, Pascarella advises you to be financially stable before giving to others. “Once you feel safe, that’s when you have to say, ‘Okay, now how can I give back and help others?’ But if your cup isn’t full, it’s very difficult to give to others around you,” she says.
The pitfalls of the 70-20-10 budget
Like most budget guidelines, the 70-20-10 budget rule comes with its own set of pitfalls.
Difficult to get out: While saving is important in any budget, Pascarella says setting aside 30% of your income is very aggressive, especially for people who are just beginning to budget their money. Often people will work their way to this budget as something more ambitious than a hard and fast rule. “Just know that Rome wasn’t built in a day, nor was the perfect budget and savings plan,” says Pascarella.
It does not separate work and play: As stated earlier, there is no line that separates your wants from your needs. While this simplifies your budget, Pascarella says it’s helpful to be able to see what percentage of your income you can have fun with. “I think separating them is great because when our clients see this choice spend in this percentage, it makes you look at your budget from a ‘wow, I’ve worked really hard. And now I have all these dollars to love, going to do fun things with it,” she said.
It lacks nuances: There are nuances in finances that simplified budgets like the 70-20-10 budget simply cannot capture. Concretely, there are often debt priorities to take into account, and 10% of your income will not be enough to cover everything. For example, some people have debts with higher interest rates than others. Limiting your repayments to 10% of your income therefore makes less sense when the unpaid debt increases each month.
The 70-20-10 budget can be useful as an early budget guideline, and it should be treated as such. If followed as the law, it can become counterproductive and can turn people away from budgeting altogether.
“Every dollar you earn should get you closer to the person you want to be,” says Pascarella. “And if you don’t really feel that way, then you still have work to do with your budget.”