The 70-20-10 Budget Rule: How It Works

The 70-20-10 budget is often touted as a simple way to build financial stability and long-term wealth for good reason. It’s easy to master, achievable on most salaries and can ensure you save enough for retirement and other spending goals. Learn the pros and cons of the 70-20-10 budget and alternative budgeting strategies here. 

What Is the 70-20-10 Rule for Budgeting?

The 70-20-10 rule for budgeting concept is about saving for the future while allocating funds for fun or other discretionary expenses. While you could save more aggressively, this offers minimum savings to build long-term wealth and financial stability. Here’s what each percentage means. 

The 70% for Essentials and Fixed Expenses

The largest portion of after-tax income should go to essentials and fixed expenses. This includes housing and utility expenses, food, transportation, basic clothing, medical care and other expenses that are essential for living. Home repairs can also fall under the essentials category, but you’ll usually need to build an emergency fund for them. 

To manage or reduce essential expenses, consider:

• Rent a room in your house or downsize to a smaller property.
• Buy local, seasonal produce and shop sales or discount stores for food.
• Buy used clothing or hold a no-spend challenge where you don’t buy any clothing for a fixed period, like six months to a year.
• Use public transportation, share a car or carpool to reduce transportation costs.  

The 20 for Financial Goals and Savings

The 20 for financial goals will offer an emergency fund, retirement wealth, and long-term financial security. The 20% you save will work for you through investments and long-term compound interest to build more wealth. It’s not just about setting aside 20%. You should also invest it in tax-advantaged retirement accounts as part of a diversified portfolio to gain maximum returns.

Setting financial goals to make saving 20% more fun can increase motivation. Then, as you watch your accounts grow, you’ll know you’re creating a secure future for yourself and your family. 

The 10% for Fun and Discretionary Spending

The 10% for fun and discretionary spending encompasses everything that’s not essential. Allocating the 10% for enjoyment and leisure can make sticking to a long-term budget easier. The 10% fun can include vacations, restaurant meals, concerts, theater, movie tickets, amusement park entry and anything else fun for you. If you have a hobby or passion, this can also fall in the 10% category. 

Smart and responsible discretionary spending focuses on what really matters to you. Maybe that’s an amazing annual family vacation, or maybe that’s a weekly meal at a restaurant, sports lessons, or a new guitar. Consider what will bring the greatest value to your life, and focus on that first.  

How to Determine Whether the 70-20-10 Budgeting Approach Is Right for You?

While the 70-20-10 budget is practical to ensure you save enough, it’s not right for everyone. Here’s what you should consider. 

Evaluate Your Financial Goals

Consider your short-term and long-term financial goals. Are you saving for a specific purpose, such as retirement, a down payment on a house or starting a business? Assess how the 70-20-10 budget aligns with these goals. If you have a higher income, you might be able to save substantially more and reach savings goals sooner. 

Analyze Your Income and Expenses

Calculate your monthly income and track your expenses. Determine whether you can comfortably allocate 70% to essential expenses like housing, utilities, groceries, transportation and healthcare. If your essential expenses exceed 70%, you may need to adjust or explore ways to reduce them. If you can’t reach the 70% essential spending target right away, you may also consider part-time income to supplement primary income sources. 

Assess Your Savings and Debt Situation 

If you have high-interest debt, allocating the 20% savings toward debt repayment can help you reduce it faster and lead to further savings in the long run. If you have little to no savings, allocating 20% toward savings can help you build an emergency fund or work toward your financial goals. The 20% is your path to financial freedom. In general, the priorities should be:

• Paying off high-interest debt
• Building an emergency fund
• Building up savings
• Investing in retirement accounts

Consider Your Lifestyle and Priorities

Think about your values and what brings you joy. If discretionary spending is important to you, the 10% allocation can provide flexibility for entertainment, hobbies, vacations or other personal expenses. If you’re focused on minimizing expenses and saving aggressively, you may need to adjust the percentage allocated to discretionary spending or choose to save it entirely for a period of time. 

Seek Professional Advice if Needed

If you’re unsure about the 70-20-10 budget’s suitability for your situation, consider consulting a financial adviser. They can provide personalized advice based on your unique circumstances, help you create a budget and guide you toward achieving your financial goals. They may also be able to advise you on budgeting tips, investment planning and long-term retirement goals. 

Advantages of Using the 70-20-10 Budget Method

The 70-20-10 budget offers significant advantages, from reaching long-term savings goals to building a strong financial safety net. Here’s why you should consider the 70-20-10 budget. 

Allows a Balanced Allocation of Financial Resources

With the 70-20-10 budget, you ensure that financial priorities are met while still allowing room for personal enjoyment and future financial growth. The idea is to create balance. You don’t want to use 100% of your income on essentials or go without any fun or discretionary spending. The 70-20-10 budget offers balance while protecting your financial future. 

Promotes Financial Discipline and Responsible Money Management 

The 70-20-10 budget encourages you to prioritize essential spending and make informed choices about where your money goes. This helps to prevent overspending and encourages you to save for the future. Learning money management is one of the most important wealth-building strategies for your financial future. 

Encourages Long-Term Financial Planning

With 20% of income allocated to savings, you can build a financial cushion for emergencies, save for larger purchases or invest in your future retirement. With consistent savings, you’ll also be able to take advantage of compound interest to build more wealth over time. 

Promotes Financial Stability 

By retaining the 70-20-10 budget, you cover basic needs while creating a financial safety net in case of unexpected expenses. This stability provides peace of mind and reduces financial stress. It also reduces the chances that you’re forced to take on high-interest credit card debt in case of emergencies. 

Limitations of Using the 70-20-10 Budget Rule

While the 70-20-10 budget offers many advantages, it’s not for everyone. Here are the limitations to consider before adopting this lifestyle. 

Lack of Flexibility

If you’re strict about the concept, it may be difficult for you to adjust your budget based on changing financial circumstances or unexpected expenses, as the rigid allocation percentages may not allow for necessary adjustments. While you can get around this limitation by averaging expenses over a three-month period, this strategy can make it more challenging to stick to a budget. 

Potential Missed Opportunities

You may miss out on potential ways to increase income or optimize their financial situation if you’re rigidly focused on the 70-20-10 budget. Rather than locking yourself into a specific savings percentage, look for opportunities to increase income so savings can become even higher. 

Not Suitable for Everyone 

As the 70-20-10 budget assumes a specific allocation of income without considering an individual’s circumstances or financial goals, this one-size-fits-all approach may not be effective for some with varying financial situations or objectives. Low-income families may find it difficult to maintain a 70-20-10 budget, while high earners with aggressive savings goals may choose to save up to 50% of their income. 

Alternatives to the 70-20-10 Budget Rule

Wondering what other options you can consider for financial planning? Here are other budgeting options that may better fit your family. 

Zero-Based Budgeting

While companies use zero-based budgeting (ZBB) more often, families can adopt this method. With zero-based budgeting, you’ll allocate funds each month based on need and justification. You start with a zero base and build out from there, starting with essential expenses. The total budget can change per month, or category costs can vary monthly, allowing for a more customized and flexible approach. 

Activity-Based Budgeting

Activity-based budgeting (ABB) is also primarily used by companies. With ABB, you’ll record, research, and analyze activities that lead to costs. Budgets can be developed based on these activities and essential costs. 

Performance-Based Budgeting

Performance-based budgeting is also primarily used by governments and companies, but some families may adopt it. With performance-based budgeting, you’ll allocate funds based on results contributing to long-term goals. 

While governments use performance-based budgeting as justification to maximize funds toward programs that work, families can take a similar approach. Instead of programs, consider “programs” like housing, food and transportation as essentials, and then build the budget around additional items that bring the greatest value to your family’s life. 

Tips for Reaching Your Financial Goals

Whether you use the 70-20-10 budget rule or choose another budgeting method, regularly allocating funds to savings goals can build financial security and long-term freedom. Once you’ve built an emergency fund, invest in tax-advantaged retirement and brokerage accounts to build wealth even faster.

Frequently Asked Questions