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- The 70/20/10 rule is a guideline that balances spending, saving, and debt repayment.
- It's a simple method to get started managing money but should be adjusted to fit your needs.
- One of the limitations of the 70/20/10 rule is that it doesn't separate essential and nonessential expenses.
Budgeting is a great way to gain control over your income. But with seemingly endless ways to divvy up your money, it can be helpful to follow one of the many budgeting guidelines out there, such as the 70/20/10 rule.
Here's everything you need to know to determine if this method is a good fit for you.
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What is the 70/20/10 rule?
Like other budgeting guidelines, such as the 50/30/20 rule, the 70/20/10 budget offers a framework that tells you how much of your income to direct toward spending, saving, and debt repayment.
The rule earmarks 70% of your after-tax income for essential and nonessential expenses (including minimum debt payments), 20% for savings and investments, and 10% for additional debt payments or donations.
How to apply the 70/20/10 rule
Allocating 70% for expenses
Unlike most budgets, which separate your cost of living and discretionary spending into two different categories, the 70/20/10 rule condenses both into one category. Because there is no line separating your needs from your wants, it might be helpful to figure out what percent of your spending is fixed, such as rent or utilities, and work out what percent of your spending money is still available to spend on things you want, such as concert tickets or meals out with friends.
Saving 20% of your income
The 70/20/10 rule allots 20% of your income for savings or investments. This can include an emergency fund, down payment, or retirement plan.
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.
Using 10% for extra debt repayment or donations
The final 10% of your budget goes toward paying down debt or donating money. When it comes to debt, this category is for debt that isn't immediately due, like making extra payments on student loans or medical debt. On the other hand, minimum payments usually fall within your monthly expenses, like credit card debt payments or car loan payments.
The donation aspect of the 70/20/10 rule is what makes this guideline unique, as most budgeting guidelines don't have donations explicitly included in the budget. This encompasses donations to charities or causes that you believe in or donations to houses of worship or alma maters. This can also mean supporting your parents through their retirement. A 2018 Pew Research Center study found that 14% of adults living in someone else's house are a parent of the household head.
Benefits of the 70/20/10 rule
Dani Pascarella, a CFP® professional and the founder of OneEleven Financial Wellness, says that because of its simplicity, the 70/20/10 budget is best for people who are just starting to manage money.
"Most schools don't teach personal finance. So most people are in the situation where they feel like everyone around knows this stuff, feel very, very silly," Pascarella says.
Using a simple and streamlined approach like the 70/20/10 rule can get you organized and focused on your savings goals. As your needs evolve and you become more comfortable with spending and saving, you'll probably want to adjust the percentages to fit your unique situation.
With its designated allowance for donations, this approach is also appealing to those who are socially conscious. However, Pascarella advises that you should be financially stable before giving to others. "Once you feel secure, that's when it's time to say 'OK, now how can I give back and help others?' But if your cup isn't full, it's very hard to give to the others around you," she says.
Challenges and how to overcome them
Like most budgeting guidelines, the 70/20/10 rule comes with its fair share of pitfalls. Here are a few to be aware of:
- High savings rate: Oftentimes, people will work their way toward this budget as something more aspirational than a hard-and-fast rule. "Just know that Rome wasn't built in a day, neither was the perfect budget and savings plan," Pascarella says. If you can't yet manage to set aside 20% of your take-home income for the future, that's fine. Start where you can because saving a little is better than saving nothing.
- No separation for work and play: Though having one category for all spending simplifies your budget, Pascarella says there's value in being able to see the percent of your income that you get to have fun with. "I think separating them out is great, because when our clients see that choice spending in that percentage, it makes you look at your budget from a place of 'wow, I worked really hard. And now I have all of these dollars to like, go do some fun things with,'" she says.
- Lacking nuance: There are nuances to finances that simplified budgets like the 70/20/10 rule just aren't able to capture. Specifically, there are often debt priorities that need to be taken into account, and 10% of your income may not be enough to cover everything. For example, some people have debts with higher interest rates than others. So limiting your repayments to 10% of your income while saving 20% may feel useless.
The 70/20/10 budget can be helpful as an early budgeting guideline, and it should be treated as such. If followed like 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," Pascarella says. "And if you don't truly feel that way, then you still have work to do with your budget."
Comparing the 70/20/10 rule with other budgeting methods
50/30/20 rule
This budgeting framework, popularized by Sen. Elizabeth Warren and her daughter Amelia Warren Tyagi in their 2006 book "All Your Worth: The Ultimate Lifetime Money Plan," separates take-home pay into necessities (50%), wants (30%), and savings/debt repayment (20%).
For those who have a hard time balancing essential and nonessential purchases, it can offer helpful parameters that are not included in the 70/30/10 rule.
Zero-based budgeting
This method requires meticulously tracking your spending to ensure that each month your income minus your expenses equals zero. Some critics of this method say that it doesn't prioritize savings, since the traditional approach is to save what's left over, if anything, after covering all of your essential and nonessential expenses. However, some zero-based budgeters label savings amounts for goals like a down payment or retirement an expense.
Tips for success with the 70/20/10 rule
Track your expenses
As with any budget, you should be disciplined about reviewing your spending monthly to ensure that you're not spending more than you can afford to in any one category.
Adjust as necessary
If by reviewing your spending you recognize that more than 70% of your income went toward living expenses and nonessential purchases last month, for example, you can consider where and how much to cut back next month.
Ultimately, the 70/20/10 rule is a framework that's customizable. If donating money isn't a priority for you right now, for instance, you can increase the percentage of your income that goes toward expenses or saving money.
Automate savings
Reaching a 20% savings rate may sound intimidating. One strategy that can help is automating your savings transfers.
If you have access to a retirement plan at work, your paycheck deferrals will be automatic. And many savings accounts have a feature that allows you to set up automatic transfers from a checking account at regular intervals so there's one less thing on your financial to-do list.
70-20-10 budget FAQs
It's an approach to budgeting that encourages setting aside 70% of your take-home pay for living expenses and discretionary purchases, 20% for savings and investments, and 10% for debt repayment or donations.
First, calculate your monthly take-home pay, then multiply it by 0.70 to get the amount you can spend on living expenses and discretionary purchases, such as entertainment and travel. Next, multiply your monthly income by 0.20 to get your savings allotment and 0.10 to get your debt repayment.
You can — and should — adjust the percentages to fit your unique financial needs. For instance, those with large debt balances may want to switch the portion of income that goes toward debt repayment and savings until the debt is paid off.
