What is the 70-20-10 budgeting rule?

  • The 70-20-10 budget is a guideline that simplifies your income distribution into spending, saving, and giving.
  • The 70-20-10 budget is ideal for people who are beginning to learn how to manage their income.
  • One of the downsides of the 70-20-10 budget is that it doesn’t separate discretionary spending from living expenses.
  • Read more stories from Personal Finance Insider.

Budgeting is a great way to take control of your income. But with seemingly endless ways to split your money, it can help to follow one of the many budgeting guidelines. “It doesn’t have to be bajillions of categories and it’s really time consuming. There are ways to actually make this digestible and easier,” says Dani Pascarella, CFP® expert and founder of One Eleven Financial.

A newer plan under these guidelines is the 70-20-10 budget, which can later serve as the basis for a more detailed budget. 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 budgeting guidelines like the 50-30-20 rule, the 70-20-10 budget offers a loose budgeting schedule that simplifies a potentially complicated process. The 70-20-10 budget guideline divides your after-tax income into three categories: monthly expenses, savings, and paying off debt and giving.

Spend 70% of your income on wants and needs

Unlike most budgets, which separate your living expenses and voluntary spending into two separate categories, the 70-20-10 budget puts both of them into one category. Since there is no line separating your needs from your wants, it can be helpful to find out what percentage of your expenses, such as rent or utilities, are committed, and to find out what percentage of your pocket money is still available.

Set aside 20% for savings and investments

With the 70-20-10 budget, invest 20% of your income in investments or savings. You can put your income into 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 guarantee you have money when you need it, but you have more income overall.

Keep in mind that you may already be saving pre-tax income in retirement vehicles like a 401(k) match, in which case you may not need to save as much of the income that reaches your bank account.

Dedicate the remaining 10% to debt service or donations

The last 10% of your budget is used to pay off debt or donate money. When it comes to debt, this category includes debt that is not due immediately, such as B. Special payments for student loans or medical debt. On the other hand, minimum payments usually fall into your monthly expenses, like credit card debt payments or car loan payments.

The donation aspect of the 70-20-10 budgeting rule makes this policy unique, as most budgeting guidelines do not explicitly budget for donations. This includes donations to charities or causes you believe in, or donations to places of worship or alma mater. This can also mean supporting your parents until they retire. A 2018 Pew Research Center study found that 14% of adults living in another person’s household are a parent of the head of household.

Here’s how to find out if the 70-20-10 budget is right for you

Pascarella says that because of its simplicity, the 70-20-10 budget is primarily intended for people who are just starting out in budgeting. This is especially important when the only way to learn budgeting is to actively seek it.

“Most schools don’t teach personal finance. Therefore, most people are in the situation where they feel like everyone around them [them] knows this stuff, and [they] I feel very, very silly,” says Pascarella. Ideally, you should develop a more elaborate budget plan as you progress, but “these simple rules make it really easy for people to understand, so if they’re starting out and feel like there’s something to do, that’s a good place to start,” she adds added.

The 70-20-10 budget with its designated donation allowance is also attractive for the socially conscious. However, Pascarella advises that you should be financially stable before giving to others. “Once you feel confident, it’s time to say, ‘Okay, now how can I give back and help others?’ But if your cup isn’t full, it’s very hard to give it to those around you,” she says.

Pitfalls with the 70-20-10 budget

Like most budgeting guidelines, the 70-20-10 budgeting rule has some pitfalls.

It’s hard to pull off: Though saving is important in any budget, Pascarella says setting aside 30% of your income is very aggressive, especially for people who are just starting to budget for their money. Often people work towards this budget as something more challenging than a hard and fast rule. “Just know that Rome wasn’t built in a day, nor was it the perfect budget and austerity plan,” says Pascarella.

It does not separate work and play: As mentioned earlier, there is no line that separates your wants from your needs. Though it simplifies your budget, Pascarella says it’s valuable to see the percentage of your income that you can have fun with. “I think it’s great to separate them because when our clients see those selected spends in that percentage, you look at your budget from a place where you’re like, ‘Wow, I’ve worked really hard. And now I’ve got all these dollars that I like, do some fun stuff,'” she says.

It lacks nuances: There are nuances to finance that simplified budgets like the 70-20-10 budget just can’t capture. In particular, there are often debt priorities that need to be considered, and 10% of your income won’t be enough to cover everything. For example, some people have debts with higher interest rates than others. Therefore, it makes less sense to limit your repayments to 10% of your income when the unpaid debt is adding up every month.

The 70-20-10 budget can be useful as an early budgeting guideline and should be treated as such. If followed like a law, it can become counterproductive and discourage people from budgeting.

“Every dollar you make should bring you closer to who you want to be,” says Pascarella. “And if you don’t really think that way, then you still have work to do with your budget.”

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