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.
Not so.
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:
#1 Housing
This encompasses rent or mortgage payments, property taxes, homeowner’s insurance, utilities (such as electricity, gas, water, and sewage), and maintenance costs.
#2 Food
This includes groceries and essential household supplies needed for cooking and eating at home.
#3 Transportation
This involves costs related to commuting to work or school, including fuel, public transportation fares, vehicle maintenance, insurance, and registration fees.
#4 Healthcare
This includes health insurance premiums, copayments, deductibles, prescription medications, and other medical expenses not covered by insurance.
#5 Utilites
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.
#8 Insurance
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.
#9 Taxes
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 clea