Are you looking for a simple method to get started on the road to budgeting? Try the 70:20:10 budget!
Everyone needs some kind of budgeting method in order to keep track of their finances.
If you don’t have one, how do you know where your money is going and know what your money is doing?
Many budgeting systems use methods that are complex, with numerous categories and a way to count each penny.
An alternative to these types of budgeting systems is the percentage-based budget, which divides your budget into categories based on a percent of your take-home income.
The 70:20:10 budget is a percentage based budget that organizes your take-home income into 3 very simple categories: spending, saving, and giving.
If budgeting seems overwhelming or you don’t want to count every single penny, check out the 70:20:10 budget. This budget is great for beginners or for anyone just learning how to manage their money and keep track of their finances.
If you would like to compare the 70:20:10 budget to other percentage-based budgets, take a look at these:
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What is the 70-20-10 budget?
Let’s dive in and check out the details of the 70:20:10 budget!
This percentage based budget is helpful for people who want to keep track of their finances but are turned off by other budgeting methods that want you to track every single penny or have dozens of categories.
With this simple budgeting method, you just separate your take-home income (your income after taxes) into 3 main categories.
Here are the percentages and categories:
70% – Spending on Living Expenses (All Wants and Needs)
First, the main and biggest category is spending. To make this budget work, you will need to be able to live on 70% of your take-home pay.
This category is for ALL living expenses, including any luxuries, entertainment, fun, or extra (non-essential) items.
Examples of basic expenses to include here:
- Car payment
- Food (including dining out)
- Utilities (water, electricity, etc.)
- Minimum required payments on outstanding debt (student loans, credit cards, etc.)
- Gifts (or you can put this in the 10% gifting category below)
You want to keep all of your monthly expenses at or below 70% of your take home income. Any extra money can be put toward one of the other categories or used for some extra fun.
20% – Savings and Investing
You should always have space in your budget to put money towards savings.
Maybe it feels hard to put that much money toward savings each month. If you currently live paycheck to paycheck it might be really hard.
Start small and work toward having at least $1000 in a savings account.
If you don’t currently have an emergency fund, setting one up and starting to put money in it should be a priority.
Emergency funds are for unplanned expenses like:
- Home repairs due to damage (like water damage or animal damage – once my sister had a squirrel or chipmunk get inside the walls of her home and she could hear it running around inside and had to have it professionally removed!)
- Job loss
- Sudden medical expenses
- Unexpected car repairs/expenses or having your car towed
- Travel to visit a sick/dying loved one
Many financial experts recommend having enough money in your emergency fund to cover a minimum of 3-6 months of basic living costs.
Don’t think that you won’t need an emergency fund.
You never know when some unexpected expense will come up: medical bills, repair, a sudden death in family.
Your emergency fund should be in an account that is easy to withdraw money from (for example, a basic savings account, not a retirement account).
Once you have a strong emergency fund, here are some other financial goals to work toward:
Other financial goals to consider:
- Sinking funds – money you set aside into an account for future planned expenses that will happen only once in a while (like a vacation or car repairs, regular updates or repairs to your home, gifts for Christmas or birthdays, activities for kids)
- College savings for kids (or help them go to college debt-free!)
- Funds to start a business
- Real Estate investments
Be sure to start retirement savings as soon as possible. If your employer offers a 401K match, definitely contribute the full amount if possible.
10% – Pay Off Debt or Donations to Charity
Pay Off Debt
The final 10% should be used to pay off debt. (If you have a lot of debt, you could put the 20% toward debt payoff – or 20+10=30% – to aggressively pay it off as quickly as possible.)
These debt payments would be more than the minimum required amount and would help you reach a debt-free life faster.
If you have little or no debt, you can use the 10% as donations to charity.
If you have a lot of debt, you might want to focus on paying it off as quickly as possible and using part or all of this 10% toward that goal, especially if the interest rate is very high.
Example of the 70-20-10 Budget in Action
Let’s look at a simple, practical example of the 70-20-10 budget:
To follow these percentages, you need to know your take-home pay:
- Take-home pay x 0.70 = all expenses for the month
- Take-home pay x 0.20 = savings and investing
- Take-home pay x 0.10 = paying off debt or donations to charity
For example, if you take home $4000 a month, you would allocate your funds like this:
- $4,000 x 0.70 = $2,800 – all expenses
- $4,000 x 0.20 = $800 – savings and investing
- $4000 x 0.10 = $400 – paying off debt or tithing/charity
Who Should Use the 70:20:10 budget?
Since this budget is so simple and easily adapted to any income, nearly anyone can use it!
The Benefits of the 70:20:10 budget
Here are the basic pros of the 70:20:10 budget:
- Very simple to start and use
- Great for people new to budgeting
- Only one category for all of your spending for the month (need, wants, etc.).
The Cons of the 70:20:10 budget
Don’t forget to to consider some of these cons of the 70:20:10 budget:
- Hard for beginners to only live off 70% of income
- No division between wants and needs. If you struggle with overspending, this budget might be difficult for you.
- If you are currently living paycheck to paycheck, it might be hard for you to find money for the other 2 categories.
Try Another Percentage-Based Budget
Percentage-based budgets are so easy to follow.
Here are some other ones you could try instead:
60-30-10 rule budget – This is a great way to save money fast!
30-30-30-10 budget – Another simple budget, but with a higher savings portion.
10-10-80 budget – A variation of the 70:20:10 budget.
Final Thoughts on the 70:20:10 budget
Whether you start with the 70:20:10 budget or another percentage based budget it doesn’t really matter. Set up a budget and get started today! This will help with your financial future for yourself and your family. Have you tried the 70:20:10 budget? What do you like about it?