Money management can be daunting, but understanding more about the tried-and-tested 70-20-10 budget rule can help you to make more informed financial decisions. What exactly is the 70-20-10 budget rule, and how does it work?
This financial golden rule guides you in how to allocate your income based on your own personal goals, so you don’t feel stuck or lost when it comes to budgeting.
In this article, we’ll explore what the 70-20-10 budget rule is, some pros and cons, and how it can help you reach your personal financial goals. Ready to experience the financial rewards of long-term savings sustainability? Read on!
What is the 70-20-10 Budget Rule?
What is the 70-20-10 budget rule? It’s a relatively simple way to budget your money and manage finances. This system recommends that you divide your after-tax income into three categories: 70 percent for living expenses, 20 percent to save money, and 10 percent for debt.
By allocating your money in this way, you can ensure that your basic needs are taken care of while saving money, paying off debt, and still allowing you money for those little extras life has to offer.
The next time you’re creating your budget, consider giving the 70-20-10 principle a try. It could be just what you need to keep up with your financial goals!
Use the 70-20-10 Rule in Budgeting
Budgeting is one of the most important steps to becoming financially secure, and there’s a simple way to make sure you’re setting yourself up for success. The 70-20-10 rule is an easy way to break down your budget so you can get on the road to financial freedom faster.
It’s a simple idea, but it can pay off in a big way when used strategically. The 70-20-10 rule holds that:
- 70 percent of your after-tax income should go toward basic monthly expenses like housing, utilities, food, transportation, and personal living expenses;
- 20 percent should be saved or put into investments,
- leaving 10 percent for debt repayment.
By following this ratio, you’re investing in both your future financial security and also your present quality of life. Best of all, the 70-20-10 rule is flexible so you can adjust it to fit your individual circumstances.
This smart budget rule will help you manage your money more efficiently, ensuring that you’ll no longer have to worry about running out of cash unexpectedly or constantly feeling behind savings-wise.
70% – Essentials and Discretionary Spends
We’ve all heard the advice to spend no more than 70 percent of our living expenses from our monthly income, but what exactly does this mean?
In a nutshell, living expenses include “essentials” (this means basic needs like rent, food, and utilities) and “discretionary spends” (the extras like eating out, entertainment, or buying new clothes).
To make sure we have enough money for everything we need and some of the things we want in life, keeping within this 70 percent for essentials and discretionary spending is a good guideline. This leaves 30 percent of your monthly income for allotting to save more money and debt repayment—be that credit card debt, overdue utility bills, or other debts in your personal finance.
Fixed VS Variable Expenses
Understanding monthly expenses is a vital part of budgeting and knowing the difference between fixed and variable expenses helps us plan ahead.
Fixed expenses are those that remain the same monthly, like rent or a mortgage, car payments, cable bills, and insurance premiums. Although their cost does not change monthly, it’s important to track changes in these expenses as they can still fluctuate over time.
Variable expenses are living costs that you need each month but may vary in cost, such as utilities, groceries, gas for your car, clothing, hobbies, and entertainment. It’s crucial to be mindful of both types of monthly expenses when managing a budget because they can take up large percentages of our income.
Being aware of fixed versus variable expenses helps you strategically plan how much money you will need on a monthly basis so that you can become better at managing your money.
20% – Savings
Everyone should have some savings available to help with monthly living expenses and to use for unexpected events.
The 70-20-10 budget rule recommends allocating 20 percent of monthly income towards savings, which helps build an emergency fund for big expenses, such as home repair or medical bills.
Saving 20 percent each month can also give you peace of mind in knowing you won’t have to worry about where the money will come from if something unexpected happens.
Setting aside a portion of monthly income into a savings account not only helps support your monthly budget plan but also allows for financial independence in case of emergencies.
It’s important to establish a habit of putting aside money for the future. Following the 70-20-10 budget rule can be an easy way to get started.
What Counts as Savings?
Saving money is a critical aspect of financial planning. The 70-20-10 budget rule recommends that 20 percent of your monthly income be allotted to savings. But what counts as savings?
While your definition may vary based on your financial goals, typically savings refer to building up a reliable emergency fund or setting aside money monthly in a savings account.
The purpose of saving money is to create an emergency fund or safety net in case any unexpected costs or expenses come up.
To save money, you want to open and maintain a savings account and make sure it’s not just an account where your extra funds are “hanging out”—monthly deposits will ensure that you’re building a healthy nest egg. The money you save now also impacts your retirement in the long term.
Savings are meant to be used judiciously and typically intended for larger purchases like a car or family vacation, although if circumstances call for it, they can be withdrawn whenever needed.
Whether your monthly income is low or high, it’s possible to find ways to save money and even small monthly contributions can add up over time.
Ultimately, it’s best to have some form of savings so you’ll be prepared if any major expenses arise unexpectedly. Establishing these habits early can make all the difference in achieving your long-term financial goals!
10% – Debt
Adhering to the 70-20-10 budget rule is a great way to make sure monthly expenses are allocated correctly and debt can be paid down. This commonly used budget style suggests that the remaining 10 percent is used for paying off existing debts.
It’s important to adhere as closely as possible to this breakdown as not doing so could negatively impact one’s ability to pay down debt. Not committing enough resources towards this effort could result in increased interest charges or an inability to keep up with monthly payments—two scenarios that further complicate the process of finally conquering long-term debt.
If this 10 percent isn’t enough, it means that monthly debt payments have become unmanageable. Without a proper budget plan, monthly debt obligations can quickly spiral out of control and become overwhelming. Left unchecked, debt that is out of control may lead to much more serious consequences, such as bankruptcy.
Taking care to pay off any outstanding debts is an essential part of taking control of your finances. By sticking to the 70-20-10 budget rule, you’re more likely to stay on track and achieve your financial goals.
How to Know if the 70-20-10 Budget is Right For You
When considering whether the 70-20-10 budget is right for you, it’s important to understand how versatile this financial planning technique can be. Although it does provide a specific structure, it can easily fit many different financial goals and needs.
Whether you’re trying to build savings while maintaining your lifestyle, or you want to invest in something riskier but potentially more rewarding, the 70-20-10 budget can work for you. It’s important to take a look at your own lifestyle and financial goals and determine if this formula will work for you.
First and foremost, you need to make sure that regular income is going where it needs to based on these percentages and adjust from there as needed. This could be a problem for those whose income and expenses fluctuate regularly. This might be someone who’s self-employed or those who live off of full-time freelance income.
Ultimately, deciding whether or not the 70-20-10 budget is right for you is about whether or not you have the discipline to make it work. Of course, people with limited disposable income may have difficulty following this formula, so if that applies to you, then feel free to reach out to a financial expert or find another tool that might work better for your financial situation.
The Pros of a 70-20-10 Budget
Creating a budget can seem daunting, especially when you have a habit of indulging in discretionary spending, but if you go the 70-20-10 route, you’ll start to see the benefits.
Building an emergency fund is easier by committing to this type of budget. You’ll have resources available when unexpected bills come up and feel prepared.
Savings goals naturally become part of your lifestyle too since with 70-20-10 you’re setting aside money regularly for them. This allows you some extra padding (an emergency fund) for those unforeseen big-ticket items or expenses that can catch us off guard from time to time, forcing us to spend money.
The last 10 percent allows for paying down debt and building healthy credit, which comes with its own set of benefits both short-term and long-term. All these pros combine to make the 70-20-10 budget a solid and reliable option that will benefit your financial health in major ways.
The Cons of a 70-20-10 Budget
We’ve been looking at all the plus factors or pros of the 70-20-10 budget rule and now it’s time to consider what, if any, are the cons of this financial tool.
Although the 70-20-10 budget provides stability and balance to a person’s finances; its inability to successfully prioritize personal financial needs and wants over unexpected expenses may make this method of budgeting difficult to maintain.
When starting out, an issue with this kind of budget is that it may encourage people to use credit cards to buy items they can’t afford, which could lead to being overburdened with debt in the long run due to interest payments.
The fixed percentage model of a 70-20-10 budget strategy may not allow for major life purchases, such as buying a house or financing college tuition.
Having limited capital for long-term savings can also affect retirement goals or having an emergency fund in case of events out of your control occur.
There can be unintended consequences when relying too heavily on this model. Constantly dipping into savings for lifestyle funds leaves less money available for necessities and retirement planning and if not monitored carefully, creates an unsustainable cycle.
Before deciding if this type of budget plan fits your needs, consider both the pros and cons so that you can make an informed decision about how best to save and spend your money.
Budgets Are Designed to Be Flexible and Reflect Your Goals
Budgets are an important part of your financial journey, allowing you to take control of your money and achieve the goals you’ve set for yourself.
With careful planning and a budget that is designed with flexibility in mind, you can easily adjust it to reflect changes in life circumstances or at times unexpected purchases.
You can also use budgets to prioritize certain expenses over others and ensure that you stay within your desired spending limit. Depending on what you desire, a budget can be constructed from simple lists or complex formulas.
Once constructed, a budget will help open up room for the growth, flexibility, and adaptation necessary for reaching financial success, all while staying true to yourself and your vision.
With a budget that is tailored specifically to meet your individual wants and needs, you can ensure that each and every penny counts and allows you to get closer to those all-important goals without worry or stress.
The Final Word On the 70-20-10 Budget Rule
We hope you’ve enjoyed this article, “Finding The Right Budget For You: What Is The 70-20-10 Budget Rule” and are looking forward to making some financial changes that are both sustainable and rewarding.
Should you have more questions and are looking for more ways to take control of your finances, be sure to contact The Budgetnista.
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