Are you among those who are curious to learn about the 70 20 10 budget rule?
A 70 20 10 budget rule is the beginning of every budgeting plan. And this guide will help you understand what is budget, the 70 20 10 rule, how it works, and the difference between the 50 30 20 budgeting method.
The 70-20-10 budget rule is a powerful strategy for managing your finances. It involves allocating 70% of your income to necessities, dedicating 20% to savings, and reserving 10% for discretionary spending. This simple yet effective approach helps you balance essential needs, build savings, and enjoy your money wisely.
In this blog, we’ll explore the importance of the 70-20-10 budget rule in attaining financial stability and reaching your goals. Let’s get started on the path to financial success.
What Is A Budget?
A budget is a financial blueprint and provides you with an estimation of expenses and revenue over a specified period and is generally re-evaluated and compiled periodically.
Budget can be made for a government, a person, a group of people, or just about anything else that splurges and makes money.
What Is The 70 20 10 Budget Rule?
The budget numbers are the % numbers to define the allotment of your after-tax incomes into three distinct buckets of spending: Spending, Saving, and Sharing.
An instance of this is suitable for every $100 you receive after-tax; you splurge $70, save $20 for the rainy days and grant $10. That’s why a budget is designed to help you plan how to live peacefully and happily.
How Does The 70 20 10 Budget Rule Work?
The 70 20 10 Budget rule is divided into three buckets based on a certain percentage.
What Is 70% Spending?
Spending is easy, and we all know everything about it and how to do it. Since it is simple, and if we’re running short of a budget or plan, it’s more likely that you splurge more than your earnings. Financial consultants come across many such circumstances in their daily life. We would say that most people have more than 70 percent of their earnings consumed by payments made out of bills and from their daily expenses. If you’re more splurgy, you have to figure out a few ways to grave your costs.
70 percent of your net income will go into expenses like:-
Gas, groceries, student loan bill, credit card bill, car note, car insurance, child care, personal care, dining out, entertainment, clothing, medical costs, travel costs, gifts, personal care items, internet bill, phone bill, utilities, and mortgage payments or rent.
You do not have to dwell deep into its specifics on what percentage you will spend. If you want to splurge a large part of this money on eating out and travelling, you are not bound to do so (as long as your necessities and bills are covered)
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20% For Savings And Investments
In the 70 20 10 budget rule, you will direct 20 percent of your payments to both saving and investment. It could include:
- Sinking funds for future purchases
- Your emergency funds
- 529 college savings plan
- Investing in real estate
- Lend money to start a business
- Investing in bonds and stocks
- Retirement savings
During emergencies, if you are left with little or no money in your savings account, then you should target creating your emergency funds until you have sufficient balance to cover 3 to 6 months of necessary expenses.
However, it is good to save money for various saving objectives parallelly. You might feel that your retirement is a long way away, but it is best to begin the chapter as soon as you can so that you can enjoy the benefit of compounding power.
What Will Happen If You Splurge Too Much?
Most of the people in the U.S are extravagant. Popular TV shows and radio hosts often beat up their spectators on splurging too high. Similarly, If you’re splurging too much, you should examine – how to spend less.
Unfortunately, it’s not that easy and takes time too. It depends on your condition; there are a few things that you need to have like – a truck or a reliable car for work.
What About 10% Sharing?
The 10 percent of your earnings will either contribute to the donation or pay off debt (or both). You may want to make extra payments to pay off your student loans, donate for a noble cause, pay down debts of credit cards, minimize the principal on your mortgage, and repay personal loans.
You must cover your minimum payment bills, with 70 percent of your earnings reserved for monthly expenses. However, this money is used to make add-on payments that will help you pay off debts.
If you have got several debts to pay off, use the debt avalanche or the debt snowball methods. With the avalanche method, you will primarily concentrate on the debt, having the highest ROI. With the snowball method, you will begin with the debt with the lowest balance.
If you’re free from debt, use the extra cash to provide them to organizations or causes that concern you. Many budgeting strategies do not specifically donate, making the 70 20 10 budget quirky.
How Is The 70 20 10 Budget Rule Different From The 50 30 20 Budgeting Method?
The 70 20 10 budget rule is not the only route by which you can present the budget by percentages. Instead, you can also go with the 50 30 .20 budgeting method.
A 50 30 20 budget still uses percent, but their work goes differently. Your spending will somehow look like this:
- 50% – Needs
- 30% – Wants
- 20% – Savings
The 50 30 20 budgeting method provides you 80 percent of your earnings to splurge compared to the 70 20 10 budget rule. But 80 percent has to be divided between needs plus wants, and it has to cover every bit of your splurge in a month.
You are still saving 20 percent of your earnings with the 50 30 20 budgeting method. But this budgeting system does not particularly need you to allot another 10 percent tithing or to invest.
If you want to figure out the best between the 70 20 10 budget rule vs 50 30 20 method, it depends upon how and in what way you want to spend and save your money.
If you want to place all your spending’s together, then have the rest for investing or saving you can perform with the 70% budget.
If you want to differentiate between how much goes to needs and wants, you are good to go with the 50 30 20 budgeting method.
Fixed v/s Variable Expenses
Fixed Expenses | Variable Expenses | |
Definition | Recurring costs with consistent amounts | Expenses that fluctuate based on usage or consumption |
Examples | Rent or mortgage payments | Groceries, utilities, entertainment |
Characteristics | Stable and predictable | Varying amounts based on needs and choices |
Planning | Easier to budget and forecast | May require more flexibility and adjustment |
Control | Less influence on immediate changes | Can be adjusted and reduced based on priorities |
Importance | Essential for basic needs | Can be discretionary and more flexible |
Long-term impact | Stable and consistent | Can be managed to control overall |
Pros Of A 70-20-10 Budget
(i) Provides clear income allocation.
(ii) Encourages savings and debt reduction.
(iii) Allows for flexible personal spending.
(iv) Promotes mindful spending habits.
Cons Of A 70-20-10 Budget
(i) Lacks customization for individual circumstances.
(ii) Offers limited flexibility for specific needs.
(iii) May neglect short-term financial goals.
(iv) Can be unrealistic for low-income individuals.
Is The 70-20-10 Budget Right For You?
Consider these factors:-
(1) Financial Goals: Assess if it aligns with your savings and debt reduction objectives.
(2) Income Level: Ensure you can cover essential expenses while allocating 20% to savings.
(3) Spending Habits: Determine if the structure can help improve your financial discipline.
(4) Flexibility Needs: Evaluate if it allows for personal preferences and unexpected expenses.
(5) Customization: See if you can adapt the budget to fit your unique situation.
(6) Financial Stability: Assess if it promotes a stronger financial foundation.
Conclusion
The 70-20-10 budget rule offers a straightforward and practical framework for achieving financial balance. By allocating your income into three distinct categories – necessities, savings, and discretionary spending – you can establish healthy financial habits and work towards your financial goals.
Embracing the 70-20-10 budget rule empowers you to take control of your finances, reduce debt, create an emergency fund, and make informed spending decisions. Start implementing this rule today and embark on a journey towards financial freedom and a brighter future.
FAQs
The 70/20/10 budgeting method is a financial strategy that suggests allocating 70% of your income to essential expenses (such as rent, groceries, and utilities), 20% to savings and investments, and 10% to discretionary spending or “fun” expenses.
Essential expenses are the necessary costs of living, including housing, food, transportation, utilities, and insurance. They are typically fixed or semi-fixed costs that you must pay regularly.
The 20% category is meant for savings, investments, and debt repayment. This includes contributions to your emergency fund, retirement accounts, investments in stocks or bonds, and paying down high-interest debt.
Discretionary spending covers non-essential expenses and personal indulgences. This can include dining out, entertainment, hobbies, and other activities that enhance your quality of life but aren’t considered necessities.
