70/20/10 Rule for Budgeting

What Is the 70/20/10 Rule?

The 70/20/10 rule is a budgeting strategy that allocates 70% of your after-tax income to your living expenses, 20% to savings and investments, and the remaining 10% to debt and donations. It’s an easy and straightforward way to organize your expenses and improve your money habits.

Key Things to Know About the 70/20/10 Rule for Budgeting

• It uses 70% of your after-tax income to cover your needs (like rent and gas) as well as your wants (like eating out and streaming services).
• After your living expenses are taken care of, the remaining amount gets split up, with 20% going to savings and 10% being used for paying down debt and making donations.
• This rule is a recommended guideline, and the percentages can be adjusted to fit your financial goals.
• One downside of the 70/20/10 budget rule is that it does not separate discretionary spending from your necessities.

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How the 70/20/10 Rule Works

With the 70/20/10 budget rule, you are taking your after-tax income and splitting it into three categories: living expenses (70%), savings (20%), and debt (10%). List the bills and expenses that go into each category and check whether any of the categories are going over the allocated percentage. If any are, adjust by cutting unnecessary spending until the budget is balanced. Below is a breakdown of some types of expenses that would be included in each category.

Allocate 70% of Your After-Tax Income to Living Expenses

Living expenses include expenses that are necessary for your survival and those that are for your enjoyment.

Examples of Mandatory Living Expenses

• Mortgage or rent payments
• Food
• Utility bills
• Minimum credit card or loan payments
• Insurance or health care costs
• Transportation costs
• Child care

Examples of Discretionary Expenses

• Gym memberships
• Dining out
• Vacations
• Streaming services
• Sporting events, movies or concerts
• Unnecessary jewelry, clothing, or accessories
• Supplies for hobbies

Deposit 20% of Your After-Tax Income to Savings and Investments

This category is for money that you put away for the future. For instance, it can be money that you are saving for retirement, your kid’s college tuition, or a big purchase like a down payment on a house.

Examples of what would be under this category include:

• Contributions to an IRA or 401k account
• Building an emergency fund to cover three to six months’ worth of expenses
• Putting funds into a savings account for a future big purchase
• Adding funds to an investment account

Put the Remaining 10% Toward Debt and Donations

After you take care of your living expenses and contribute to your savings goals, the remaining 10% of the budget should go to paying down debt and making donations to charity. This includes extra payments you make toward debt, like loans and credit cards, outside of the minimum payment. If you don’t have any debt, you can make donations to causes that are important to you or you can put the additional funds into your savings category.

70/20/10 Rule Examples

Say, for instance, your job pays you $5,000 per month after taxes. Below is a breakdown of how your paycheck will be divided using the 70/20/10 rule.

• $3,500 (70%) for bills and daily spending
• $1,000 (20%) for savings
• $500 (10%) for paying down debt

Now imagine your paycheck is $3,000 per month after taxes. You will have a little less to work with in each category, but the breakdown will be the same.

• $2,100 (70%) for bills and daily spending
• $600 (20%) for savings
• $300 (10%) for paying down debt

It’s important to note that this rule is a general guideline, and you can adjust the percentages to fit your financial situation. For example, if you want to get out of debt sooner, you can allocate more funds to your debt and donations bucket and reduce your living expenses category.

Pros and Cons of the 70/20/10 Budget Rule

The biggest advantage of the 70/20/10 budget rule is that it is simple to understand and follow, while the biggest disadvantage is that it doesn’t separate necessary bills from discretionary spending. Looking at the pros and cons of this budgeting strategy will help you determine whether this rule will work for your financial situation.

Pros

• Simple to understand. The 70/20/10 budget rule doesn’t involve any complicated math, and the percentages make it easy to figure out how much money you can spend in each category. Plus, you won’t have to separate needs from wants, and it will be easy to make adjustments if your income changes because the percentages will stay the same.
• Works better for people with a high cost of living. With more than two-thirds of the budget going to monthly bills and living expenses, people in an area with a high cost of living can allocate more funds to cover necessities like housing and groceries compared to other budgeting methods.
• Encourages you to get out of debt sooner. The 70/20/10 rule has a specific category designated to paying back debt. If your cost-of-living expenses are under 70%, you may want to consider increasing your debt repayment bucket above 10%.
• Promotes saving. Allocating 20% to saving every month gives you the opportunity to accumulate funds for the future, whether that is to save for a down payment on a house or build an emergency fund to cover unexpected expenses.

Cons

• Unrealistic savings goal. This rule may be tough to follow for people who don’t have enough money left over after taking care of living expenses and debt payments to save 20% of their income.
• Doesn’t allow you to separate your needs from your wants. This rule can make it difficult for some people who need to figure out where to cut back on discretionary spending since it is placed in one category with bills, like rent and electric, that must be paid.

Alternatives to the 70/20/10 Budget Rule

The 70/20/10 budget rule is not going to work for everyone. If you tried this method and it is not helping you pay down debt or accomplish your other financial goals, there are some alternatives you can try instead.

50/30/20: Your after tax income gets separated into three categories: 50% for needs, 30% for wants, and 20% for savings. You can see our comparison of the 50/30/20 rule and the 70/20/10 rule below.

30/30/40: Housing costs take up 30% of your budget, while 30% goes to other necessary living costs like food and insurance, and the remaining 40% is for savings and discretionary spending.

80/20: You will put 20% of your after-tax income into savings and the remaining 80% goes to everything else.

60/40: You spend 60% of your after-tax income on fixed expenses, like your mortgage, and the remaining 40% goes to savings and other expenses outside of your normal monthly spending.

Zero-Based Budgeting: You subtract expenses one by one until every dollar of your income is accounted for. When you subtract your expenses from your income, it will always equal zero.

Envelope Budgeting: You categorize expenses in digital or physical envelopes. You can’t spend any more in a category for the month if all the money in that envelope has been used up.

70/20/10 vs. 50/30/20

The 70/20/10 method of budgeting is gaining traction since it allocates more funds to living expenses than the 50/30/20 rule. However, the 50/30/20 rule is still very popular since it focuses on prioritizing needs over wants by specifically assigning half of your budget to necessary expenses. Below, we break down how these two budgeting strategies stack up against each other.

70/20/10 Budgeting Tips

Even though the 70/20/10 budget rule is easy to understand, budgeting can still be complicated. Fortunately, we’ve got some tips that can make the process less daunting.

Track your expenses.

Use budgeting tools like the ones available on WalletHub to track where your money is going. This can help you get a better understanding of how you’re spending your money.

See where to cut back on spending.

If you notice you need more than 10% of your take-home pay to cover your debts, see if there is anywhere you can cut back. You may want to look at your living expenses and cut down on any unnecessary spending, like on concert tickets or eating out at restaurants.

Automate your savings.

Set up your checking to automatically transfer funds to your savings, IRA, or investment accounts. This will help you take care of the 20% each month without thinking about it.

Stay committed.

Budgeting is not only about knowing where your money is going, but also about setting priorities to help you financially for the long-term. Consistently monitoring and adjusting your budget using this method can help you achieve your financial goals.

For more information, you can check out other budgeting tips right here on WalletHub.