Smart Budgeting with the 70-20-10 Rule

A woman sits at her home office space and works on her family budget on a laptop.

Having a clear budgeting plan can help you reduce stress about your finances and give you a more financially secure future to look forward to. Learn more about the 70-20-10 split budgeting model below.

According to a recent survey by the American Psychological Association, 64% of adults indicated money was a significant source of their stress. You might be surprised to know that number of responses includes people of all income levels. So how do we beat the financial blues? A good place to start is by building a solid budget based on your income. In doing so, you may find your resources go a bit further than you thought or that getting your finances back on track will only require a little tweaking. Whatever the outcome, you’ll feel better knowing you have a plan.

There are many strategies out there to help you build and stick to your monthly budget. Some people use the “envelope system” and put cash in envelopes for each category: bills, groceries, extra spending, etc. Others focus on paying off debts by creating a debt snowball effect, paying off the smallest debt first and then using the money that was going toward that debt for the next one. There are also a variety of ratio models you can use, dividing your income into a 70/20/10, 50/30/20 or 80/20 budget. These ratios are based on your specific income goals, such as saving more or controlling overspending.

When it comes to the ratio budget method, following the 70/20/10 split model can be extremely helpful for a lot of households. So how does it work? Well, 70% of your monthly budget should go to monthly expenses and 20% should go to savings. Where should the last 10% go? You guessed it: debt. But how do you start? Let’s break it down.

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How to Build a 70-20-10 Budget

1. First calculate your monthly income

You'll use your net monthly income as the baseline for how to budget each month.

2. Designate 70% for living expenses

This includes your mortgage/rent, groceries, gas for the car, childcare, etc. Basically, your living expenses are the necessities. Once you start, you may be surprised how far that 70% can go. Calculate 70% of your net monthly income and subtract your living expenses. If you have income left for this category, that’s money you can spend on other things. If you don’t, stay calm. We’ll cover that a little later.

3. Designate 20% for savings

This percentage breaks down into three subcategories. The first subcategory is 10% for retirement. If you’re younger, this may not seem like a priority, but putting aside funds for retirement early on is crucial. It’s been estimated that a retiring couple could need up to $295,000 for health care alone, so it’s important to plan ahead to make sure you have enough time to save for these kinds of expenses.

Now that you’ve calculated your growing nest egg, set aside 5% for emergencies. Emergencies can include anything from car trouble to periods of unemployment. It’s there for any large, unforeseen expenses that may come your way. We know it can be tempting to dip into this fund from time to time, but leaving it alone for as long as possible is crucial to maintaining a balanced budget. Being prepared will help you prevent adding debt through things like using credit cards or falling behind on rent or other payments.

The remaining 5% is for your specific goals. This is where you’ll put a little extra away for things like vacations, a new car, college tuition, etc. Like your emergency fund, this 5% is all about planning ahead. Impulse buys can land you in debt, which can take a lot of time and effort to get out of. You’ll feel a lot better about that trip if it’s planned and paid for. Plan ahead to treat yourself!

4. Designate 10% for debt

Part of the reason this model can be so helpful is this last category. Debt happens, and sometimes it can really start to pile up. The last 10% of your budget will go to paying down long-term debt you’ve accrued from car loans, student loans, medical costs, credit cards, etc.

Having perspective on your debts can help you increase your overall financial stability, rather than falling into a pattern of incurring debt. If you’re in debt, focus on getting your monthly payments down to 10% of your income. With some planning and discipline, you can and will make it even lower.

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5. Adjust for over and under categories

So now you’ve calculated your monthly income. You’ve divided it up. If you’re able to cover each category with funds left over, congratulations! You’re on a solid path. Keep saving and be prepared.

If it doesn’t add up, don’t worry! Now that you have your expenses organized, look at where you’ve gone over budget. For example, if your debt is at 15%, you may need to temporarily reduce one of the other categories, In the meantime, set a determined goal to get that number down to 10%, then return to your new budget plan.

Saving for future expenses is just as important to eliminating debt as paying it down. If you’re over budget on your living expenses, consider adding another source of income or cutting back wherever you can, like eating out less regularly or limiting how many online streaming services you use.

Remember, there is no one-size-fits-all for structuring a budget, and your needs and goals will change over time. But no matter which model you choose, the most important factor will always be clear goals and discipline. If you’re able to stay in line with your budget, you’ll be better prepared for life’s surprises and keep financial stress down.

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