Everyone wants to stay on top of their personal finances. But without a strategy, it can be hard to reach financial goals, pay off debt, and build wealth.
Thankfully, there are several frameworks available to help you think about the way you allocate your money each month. They’re called budgets — and they don’t have to be as strict or tedious as you think.
At their core, budgets are designed to help you manage income effectively, allocating enough funds for monthly expenses, savings, and investments. But with so many ways to divide your money, some budgeting strategies may feel cumbersome or difficult to follow.
A budget should make your financial life easier, not more difficult. Thankfully, some straightforward approaches to personal budgeting are also quite effective. In this blog, we’ll unpack one of the most popular options: the 70-20-10 budget.
What is the 70-20-10 Budget?
The 70-20-10 rule simplifies budgeting by dividing monthly income into three percentage-based categories. This budgeting formula is quite simple, but it’s a helpful way to learn more about your current spending habits and allocate money to debt repayment and future goals. Instead of tracking dozens of particular categories, this budgeting formula provides you with just three:
- 70% of your income goes to spending
- 20% of your income goes to saving
- 10% of your income goes to debts or donations
With this simplified system of income distribution, you can see exactly where your money goes and learn how to put it to work for you.
1. 70% for Spending
By following the 70-20-10 budget, you will live on 70% of your take-home income, which is the amount you bring in after taxes. To determine this percentage, simply determine your monthly income (which will require minimal math, even if you’re adding up dual incomes) and calculate 70% of that figure. Then, track your monthly spending, making sure that you stay within the 70% parameter.
Admittedly, this is a broad classification. Typically, monthly spending is categorized into two groups: fixed expenses and variable expenses. But in the name of simplicity, the 70-20-10 budget lumps your cost of living and your discretionary spending together into one streamlined “spending” category.
Fixed Expenses
Fixed expenses are costs that remain constant from month to month. This category includes:
- Mortgage or rent payments
- Insurance premiums
- Car payments
- Real estate taxes
- Childcare
- Memberships and subscriptions
When you add up your fixed expenses, you’ll be able to see how much money remains in your monthly budget for variable costs.
Variable Expenses
Variable expenses are costs that you typically incur each month, but the dollar amount changes based on your needs or purchases. Most people have more variable expenses than they do fixed expenses. This category may include:
- Utilities
- Fuel and transportation costs
- Groceries and dining
- Entertainment
- Travel
You may not pay for this entire list of variable expenses each month, and you may incur costs that are not mentioned above. Because of the simplicity of the 70-20-10 rule, you don’t need to subcategorize these costs — just track them in the “70% column” of your budget.
2. 20% for Saving and Investing
In this budgeting system, you’ll allocate one-fifth of your net income to savings and investments.
Saving
Depending on your current financial situation, you may want to put a substantial amount of the 20% into an emergency fund or a high-yield savings account to give yourself a cushion for the future.
An emergency fund is a great starting goal for anyone who has not started saving yet. From unexpected expenses like home repairs and medical bills to the loss of a job, an emergency fund can become an invaluable stress reliever in times of unexpected need. A good rule of thumb is to save 3-6 months’ worth of income in your emergency fund.
After your emergency fund is established, you may want to set up a sinking fund. This type of savings account is not for emergencies, but rather for those occasional extra expenses that don’t fit into your monthly budget like home updates, kids’ activities, or annual trips.
Lastly, even if you have a retirement plan through your employer, you may want to supplement that with personal retirement savings. Talk to your financial advisor to set up a plan that’s best for you.
Investing
If you’ve met your current savings goals, you can find investment options that will help you manage and build your wealth. A trusted financial advisor can help you build an investment strategy that makes sense for both your current financial picture and your future goals.
If you’re looking to contribute to both of these goals, you could allocate 10% of your income toward savings and another 10% of your income toward your investment portfolio.
3. 10% for Debts and Donations
The final 10% of your income is dedicated to debt repayment and giving. Your minimum payments will be covered in the “70% portion” of your budget because they are required to stay in good standing with your lending financial institution. However, to pay off debt and free yourself up to pursue other financial goals, you can allocate this final 10% toward additional loan repayments.
If you don’t need to allocate additional funds to debt repayment, you could decide to direct this portion of your income on charitable contributions. Perhaps you want to tithe 10% to your church or religious organization, or you’d like to write a check to the charity of your choice at the end of each year. This category allows you to give to things that are personally important to you.
Pros and Cons of the 70-20-10 Budget
As with any budget, there are pros and cons to the 70-20-10 rule.
Pros
- The 70-20-10 budget is simple. If you’ve tried more complex budgeting strategies and felt bogged down or overwhelmed by the numerous categories and tedious tracking, this option offers a streamlined advantage.
- The 70-20-10 budget is less restrictive than some other budgets. While some budgets require you to track and categorize every single expense, the 70-20-10 rule allows you to set larger overarching goals and stay within them.
- The 70-20-10 budget helps you work toward savings and debt repayment goals. Even in its simplicity, this budget allows you to see your financial picture clearly and celebrate progress in saving, investing, and repaying debts.
Cons
- The 70-20-10 split is challenging to maintain for some. Living on 70% of your income is simply not feasible for some, especially those who are just beginning to budget. If your fixed expenses add up to a significant percentage of that 70%, you may not be able to fit your variable expenses into the remainder.
- The 70-20-10 budget may not cover debt repayment needs. If you have significant debt or multiple types of loans to repay, 10% of your income may not be enough to help you get ahead and eventually become debt-free.
- The 70-20-10 budget does not distinguish between necessities and luxuries. In this system, it’s hard to see which expenses are essential and which are not. Some people prefer a more clearly delineated split between the two, with more options available for itemization or additional categories.
Your Personal Finances Should Be Personalized
At Marietta Wealth, we want to help you find a financial plan that works for you. Personal finances are just that — personal. It’s important to craft a plan that helps you meet your financial goals and gives you a path to freedom in the years to come.
Our advisors work closely with each client to provide comprehensive financial planning and tailored investment strategies, because we want to build you a plan that’s customized to help you meet your life goals.
We’re here to help you make your money make sense. Begin your personal financial planning journey with Marietta Wealth today.
Marietta Wealth is a registered investment adviser. Registration of an investment adviser does not imply any level of skill or training. For additional information about Marietta Wealth’s financial planning and advisory services, please see the Marietta Wealth Disclosure Brochure or ADV Part 2A for full details, which is available upon request or by visiting our website.
This article is not intended to be used, and should not be used, as the sole basis for legal advice. The reader should seek and rely upon the guidance and advice of legal counsel before making decisions regarding any estate planning tools or documents.