Budget Tips and Tricks: Why The 70-20-10 Rule?
When you hear the word “budget” you may automatically think of restrictions; things like declining plans with friends or walking right past your favorite latte that brings you the only joy of the morning.
Budgeting is actually a structure that creates boundaries for you to enjoy your favorite things while investing in your future self.
It does not necessarily mean no lattes and no plans with friends.
Quite the opposite, in fact. By using budget tips and tricks, you are creating the freedom to enjoy things you love, without the stress of worrying you aren’t planning for your future.
One of the budget tips and tricks we like is the 70-20-10 rule.
What is the 70-20-10 Budgeting Rule?
The 70-20-10 budgeting rule is a simple yet powerful guideline for managing personal finances. It suggests dividing your income into three categories: 70% for necessities, 20% for savings and debt repayment, and 10% for a ‘fun bucket.’
This rule provides a structured framework that promotes financial discipline while allowing for flexibility and balance in spending habits.
The Basics of the 70-20-10 Rule
#1 Necessities (70%)
The largest portion of your income, 70%, is allocated to covering essential expenses such as housing, utilities, groceries, transportation, insurance premiums, and other recurring bills.
These are non-negotiable expenses required for maintaining your standard of living and ensuring basic needs are met.
Necessary expenses are essential costs that individuals or households must pay to maintain a reasonable standard of living or fulfill their basic needs. These expenses are typically non-negotiable and are critical for sustaining day-to-day life. Necessary expenses commonly include:
This encompasses rent or mortgage payments, property taxes, homeowner’s insurance, utilities (such as electricity, gas, water, and sewage), and maintenance costs.
This includes groceries and essential household supplies needed for cooking and eating at home.
This involves costs related to commuting to work or school, including fuel, public transportation fares, vehicle maintenance, insurance, and registration fees.
This includes health insurance premiums, copayments, deductibles, prescription medications, and other medical expenses not covered by insurance.
Apart from housing-related utilities, other essential services like internet, phone, and possibly cable or streaming services may be considered necessary depending on individual circumstances.
#6 Basic Clothing
Expenses for clothing and footwear necessary for everyday wear and specific activities or work requirements.
#7 Childcare or Education
Costs associated with childcare, tuition, school supplies, and other educational expenses for children or dependents.
Besides health and homeowner’s insurance, other forms of insurance such as auto insurance or life insurance may be necessary depending on individual circumstances and legal requirements.
Income taxes, property taxes, and other taxes levied by local, state, or federal governments are necessary expenses that must be budgeted for.
#2 Savings (20%)
The next 20% of your income is earmarked for savings, financial goals and debt repayment. This includes building an emergency fund, saving for retirement, investing in long-term assets such as stocks or real estate, and setting aside money for major purchases or future expenses.
Savings play a vital role in securing your financial future and providing a safety net in times of unexpected financial hardship.
Saving is the act of setting aside a portion of income for future use rather than spending it immediately. It involves accumulating funds over time by reducing current consumption to achieve specific financial goals or to build a financial safety net. Saving can take various forms, including putting money into a savings account, retirement account (such as a 401(k) or IRA), investment accounts, or other vehicles designed to preserve and grow wealth over time.
#1 Emergency Fund
Saving allows individuals to build an emergency fund to cover unexpected expenses or financial hardships, such as medical emergencies, car repairs, or sudden job loss. Having an emergency fund can prevent the need to rely on high-interest debt or liquidate assets in times of crisis.
#2 Achieving Financial Goals
Saving enables individuals to work towards achieving specific financial goals, such as buying a house, funding higher education, starting a business, or taking a dream vacation. By allocating funds towards these goals regularly, individuals can make progress and ultimately fulfill their aspirations.
#3 Financial Security and Stability
Saving provides financial security and stability by creating a safety net for future needs and uncertainties. It can reduce financial stress and anxiety, knowing that there are funds set aside for unforeseen circumstances or planned expenses.
#4 Retirement Planning
Saving for retirement is crucial to ensure financial independence and maintain a desired standard of living during retirement years. By contributing to retirement accounts such as 401(k)s, IRAs, or pension plans, individuals can build a nest egg to support themselves in retirement and enjoy a comfortable lifestyle.
#5 Opportunities for Investment
Saving provides the capital needed to take advantage of investment opportunities that can generate additional income or grow wealth over time. Investments such as stocks, bonds, real estate, or mutual funds have the potential to earn higher returns than traditional savings accounts, although they also carry higher risks.
#6 Cyclical Expenses
Saving allows individuals to prepare for cyclical or irregular expenses, such as annual insurance premiums, property taxes, or holiday shopping, by setting aside money gradually throughout the year.
Saving is a crucial component of a budget as it helps individuals build financial resilience, achieve their goals, prepare for retirement, and seize opportunities for growth and investment.
By prioritizing saving and incorporating it into a budgeting strategy, individuals can better manage their finances and build a solid foundation for long-term financial success.
Oh and hey, the most important part is that saving gives you peace of mind. Peace of mind if you want to move, change jobs, lose your job, or experience any major life change.
#3 Discretionary ‘Fun Bucket'(10%)
The remaining 10% of your income is allocated for discretionary spending.
This could mean a little something special for yourself, but giving really is the best gift, right? Perhaps you have a cause close to your heart that you would like to donate to.
You can mix this one up month by month. Maybe one month you give to a charitable cause and the next two months you save for a girls’ trip.
Benefits of the 70-20-10 Budgeting Rule\
The 70-20-10 rule has a lot of pros. For example:
#1 Promotes Financial Discipline
By allocating specific percentages of your income to different categories, the 70-20-10 rule encourages disciplined spending and saving habits. It provides a clear framework for managing your finances and helps curb impulsive or unnecessary spending.
#2 Ensures Financial Stability
Prioritizing necessities and savings ensures that essential expenses are covered and savings goals are met consistently. This fosters financial stability and resilience, reducing the risk of living paycheck to paycheck and providing a buffer against unforeseen financial challenges.
#3 Facilitates Goal Achievement
Devoting a significant portion of your income to savings allows you to make progress towards important financial goals such as building wealth, purchasing a home, or retiring comfortably. The 70-20-10 rule empowers individuals to prioritize their long-term financial objectives while still enjoying a reasonable amount of discretionary spending.
#4 Flexibility and Adaptability
While the 70-20-10 rule provides a general guideline, it can be customized to suit individual circumstances and financial goals. Whether you’re aiming to pay off debt, save for a specific milestone, or increase your retirement contributions, the rule can be adjusted accordingly to accommodate changing priorities.
Practical Applications of the 70-20-10 Budgeting Rule
#1 Create a Budget
Start by calculating your monthly income and dividing it according to the 70-20-10 rule. Allocate 70% to necessities, 20% to savings and debt repayment, and 10% to the “fun bucket.”
This can also be a useful exercise when you are deciding whether or not to make a home purchase, sign a lease on a new apartment, or purchase a car. The 70-20-10 boundaries show you how much you actually have to spend on these types of expenses.
Use budgeting tools or apps to track your expenses and ensure you’re staying within each category.
#2 Review and Adjust Regularly
Periodically review your budget to assess your spending habits and progress towards your financial goals. Adjust your allocations as needed to reflect changes in income, expenses, or priorities. Be flexible and willing to make adjustments to ensure your budget remains effective.
#3 Automate Savings
Consider automating your savings by setting up automatic transfers from your checking account to your savings or investment accounts. This ensures that your savings goals are consistently funded and reduces the temptation to spend money earmarked for savings.
#4 Practice Smart Spending
Be mindful of your discretionary spending and look for ways to make smarter choices. Consider alternatives to expensive activities or purchases, prioritize experiences over material possessions, and seek out discounts or deals whenever possible.
Cons of the 70-20-10 Rule
As Business Insider points out, the traditional 70-20-10 rule does not allow for discretionary spending. The traditional rule allocated 10% for debt repayment. Discretionary spending only becomes available once debt is paid off.
This meant you needed to take control of the necessities section and categorize needs yourself. Perhaps this meant your weekly lunch with your cousins. This section can be confusing, because many people probably don’t use the word “necessity” to describe both your rent and a monthly lunch.
If it keeps you sane and helps you get through life, we consider discretionary expenses to be mandatory (within reason).
If you have a budget that is too strict and allows for no personal enjoyment, you will burn out and throw the plan out the window. Personal enjoyment and mental health are things to prioritize, while you are taking care of your expenses that keep you breathing.
This is why we prefer the modern 70-20-10 rule, where the 10% is allocated for discretionary expenses.
Budgets are a personal choice. You need to find the right fit for you and your needs.
If you are able to trim the fat yourself on which spends really are important…monthly dinner with Aunt Carol? Maybe not a need?… then this budgeting tool can work for you.
If this is not a fit, not to worry. There are plenty of other budget tips and tricks including physical budgeting planners and apps.
The 70-20-10 budgeting rule offers a straightforward yet effective approach to managing personal finances. By allocating income to necessities, savings and debt repayment, and discretionary spending in predetermined proportions, individuals can achieve financial discipline, stability, and progress towards their goals.
Some may like it’s straightforward boundaries as to what goes where. Others may find it too restricting and that it doesn’t meet their needs.
As always, we at FundsSavvy.com encourage you to do your own research, ask trusted friends and resources, and find the budget plan that is right for you.