If you don’t feel like you truly have a strong handle on your finances, one possible cause for that could be using a budgeting method tha doesn't work. While not everyone needs a to-the-penny balanced budget, some type of budgeting strategy or template is really important if you want to know where your money is going month after month. The 70-20-10 budget is one of numerous budgeting frameworks out there, and it just might be the tool you’re looking for.
If you’ve attempted to make a budget in the past and “failed,” maybe it’s time to rethink your plan. You can succeed in budgeting—you just need the right way to do it for you.
What is the 70-20-10 budget?
This budgeting concept is excellent for someone who doesn’t want to watch every cent of spending across thirty-five different categories. It’s a pared-down, simplified version of budgeting.
If you’ve ever looked at a sample budget and thought, “this is just too complicated,” then perhaps the 70 20 10 budget will be a good compromise. Maybe you’re someone who wants to feel more in control of your money, but you don’t want to be bogged down by micro-management.
The 70-20-10 budget is referring to the percentage of your take-home pay that you devote to each of three major categories: spending, saving, and giving. That’s it.
(If you’d like an even more streamlined budget plan, you could check out the 80/20 rule and apply it to your budget instead.)
If you choose a 70 20 10 budget, you would allocate 70% of your monthly income to spending, 20% to saving, and 10% to giving. (Debt payoff may be included in or replace the “giving” category if that applies to you.)
Let’s break down how the 70-20-10 budget could work for your life.
Calculate your income before setting up your 70-20-10 budget
A good first step to take before breaking down all of your spending, saving, and giving? Figure out how much money you make. You can look at pay stubs if you’re not sure of the precise amount.
Be sure to factor in a spouse or partner’s income, if you share the household income and expenses. If your income is variable—for example, if you take on freelance gigs or work in an unpredictable field—make your best estimate for an average monthly income. You might err on the low side of that income range, just to be on the safe side.
70% of income is for spending
First of all, you would have to be able to live on 70% of your income. More accurately, 70% of your take-home pay, or net income after taxes. So you need to fit all of your necessities in this category, along with any luxuries that cost money.
Once you know your weekly or monthly income, you can do the simple math of calculating how much 70% would be. That’s the figure you need to keep all of your life’s expenses under.
Types of expenses to include in the 70-20-10 budget
Well, quite simply, you would include all of your expenses here. Anything you spend money on goes under this category. All budgeting apps and strategies address this, of course.
Here’s a starter list of the most common expenses to include:
- Rent/mortgage
- Car payment
- Insurance premiums
- Utilities (electricity, water, garbage removal)
- Fuel/transportation
- Groceries
- Child care
- Dining out
- Clothing
- Entertainment
- Student loan payments (minimums)
- Other debt payments (minimums)
- Gifts (unless you keep this exclusively for the 10% Giving category)
- Travel
- Subscriptions or memberships
- Anything on a credit card
Feel free to add any other spending categories you wish.
Fixed vs. variable expenses
One way to break down your spending category is to look at both fixed expenses and variable expenses. Your fixed expenses are the ones that have a set amount to pay every month.
These are the “easy” expenses to calculate because they don’t change from month to month. You usually can count on your mortgage or rent staying the same every month, for example, unless your landlord has to raise the rent once in a while.)
Variable expenses are those that can fluctuate depending on circumstances. You may spend more on dining out during the holidays, for example.
Your utility bills may decrease during more temperate seasons of the year and go up during extreme cold or heat. Variations may be due to your spending choices but sometimes are due to factors outside your control.
Fixed expenses
- Rent or mortgage payment
- Car payment
- Insurance premiums
- Membership fees (to professional organizations, gyms, etc.)
- Subscriptions (magazines, trade publications, etc.)
- Child care (this is a fairly fixed amount, though you might add more for an extra babysitting night here and there)
- Utilities (usually variable, but can be fixed if your utility company offers a program that estimates your average monthly cost so you pay a more regular amount)
Variable expenses
- Groceries
- Fuel/transportation
- Dining out
- Utilities
- Entertainment
- Clothing
- Gifts
- Travel
The key to remember for all of your expenses is to keep the total at or below 70% of your total take-home pay in any given month. If you have any extra leftover, you can decide whether to spend it for fun or send it to pad your savings or giving category.
20% of your income is for saving
The second category is much smaller but no less important than your spending. In the 70 20 10 budget, you plan to save 20% of your total income. This is a great goal to set, especially as you consider that many American households don’t save much of anything.
Although starting with saving 10% of your income is better than nothing, increasing that amount to 20% gives you that much more wiggle room.
Of course, one of the major hurdles many people face in saving money is that they may just not have the money available to save. It’s really tough to save when you’re living paycheck to paycheck. So don’t beat yourself up if you haven’t been able to put any money aside in the past few years.
However, everyone should make it a goal to save a decent portion of their income. We all need an emergency fund as well as to save more long-term (think: retirement). Consider some of these ways to save money from your salary. Let’s dive into some of the places you can save money.
Include an emergency fund as part of your 70-20-10 budget
Although there aren’t a ton of hard-and-fast personal finance “rules,” having an emergency fund is always essential. You need to start with an emergency fund before any other savings. Your emergency fund is that sum of money that you can draw from in case of, well, emergencies.
Having to have your car towed after a breakdown on the highway would be one example. Calling a plumber to fix that leaky faucet, paying for a sudden medical co-pay, or buying a plane ticket to a beloved family member’s funeral may all be emergency situations.
In addition to funds to cover you when one or two unexpected costs come up, you need to build what some call a “full” emergency fund. For example, you might begin with a small fund of $500 or $1,000 as a first milestone. That’ll provide a bit of peace of mind.
But what if you lose your job? Or both you and your spouse get laid off? You might need money to cover your bills for weeks or months. A more robust emergency fund is usually 3-6 months' worth of basic living expenses.
When calculating how much you’d need for 3 or 6 months worth of expenses, your budget will come in handy. For this, you want to stick to only the bare essentials: mortgage/rent, transportation to work or job interviews, groceries, and any other non-negotiable expenses.
A note: be sure to keep your emergency fund in an easily accessible account. (Don’t put it into a retirement account where you won’t be able to get the money out for years.) A high-yield savings account is a good option for your basic emergency fund.
Sinking funds (for future expenses)
A different type of savings account to consider in your 70-20-10 budget are what we call sinking funds. These are for the various larger expenses that can crop up from time to time. You don’t always need $50 a month, but you might have to cover an expense of $500 six months from now.
It’s usually not a wise idea to funnel all of your sinking funds into your regular emergency fund, either. That might make it too easy to spend it on the wrong things. You can set up different accounts at the same bank for different types of sinking funds.
Then, simply set up automatic deposits into each one. Over time, whether it’s $5 a month, $50 a month, or even hundreds a month, that sinking fund will grow. The goal is to have enough money to cover costs you can reasonably expect, but can’t always calculate exactly in advance.
Sinking fund examples
- House sinking fund (for regular repairs and updates to your home and appliances)
- Car sinking fund (save for the next car you’ll buy as well as for future auto repairs)
- Self-employment tax sinking fund (freelancers and self-employed people must pay quarterly taxes on their own)
- Wedding sinking fund (for hosting a wedding or the costs of attending future weddings)
- Gift sinking funds (you might save all year for Christmas gifts, for example)
- Kids’ activity sinking funds (save year-round for those summer camps and club fees)
Sinking funds may seem like a lot to handle after filling up your emergency fund, but they’re worth the effort. They’ll make it less likely you’ll dip into your emergency fund, because you’ve prepared for these types of expenses. Plus, the expenses that happen “every so often” won’t come as such a surprise.
Retirement savings
Within the 70-20-10 budget, you can also put some of your 20% into retirement funds. Once you’ve set up your emergency fund and a few sinking funds, get to work on retirement.
Retirement is a huge goal to prepare for, but the sooner you can start, the better off you’ll be. Time is one of the most powerful tools in retirement savings. You want to give your investments time to grow through compound interest and stock market returns.
401(k)
The 401(k), 403(b), and 457(b) are some of the most common retirement accounts. These are excellent retirement savings tools, but you must have the option of one through your employer.
401(k)s offer the opportunity to save for retirement before taxes. This money goes directly from your paycheck into an investment account, reducing your taxable income. Some employers even match a portion of your 401(k) contributions, which is basically free money!
Keep in mind that these accounts are tax-deferred, not tax-free. So you save on taxes right now, but when you retire and begin withdrawing the money, you’ll pay taxes then.
In addition, there are 401(k) alternatives, and we'll talk about some of the best in the next section.
IRA and Roth IRA
Along with a 401(k) or similar employer-sponsored plan, many people in the U.S. can save in an Individual Retirement Account (IRA). There are traditional IRAs, in which you can save yearly for tax-deductible contributions.
Roth IRAs are another option, which work similarly. The difference between traditional and Roth IRAs is that the Roth IRA is taxed upon contribution, but you can withdraw the money tax-free once you retire.
Other types of IRAs exist, including the SEP-IRA, for those of us who are self-employed. For all IRAs, the government sets a limit on how much you can contribute per year. In 2022, the maximum is $6,000, or if you’re 50 or older, you can contribute up to $7,000.
College savings for kids
Another major savings “bucket” to keep in mind if you’re a parent is a college account for your children. Remember that paying for college is not mandatory for parents in most states, but as a parent, you probably want to help your kids out if you can.
After covering all of your expenses and other essential savings (and don’t neglect retirement), you can move on to college savings. Help your kids get a great education without excessive student loans.
As with any type of savings, when it comes to college planning, the earlier you begin, the better. That doesn’t mean you shouldn’t save anything if your child is already in high school, but starting when they’re younger is best.
Custodial accounts and 529 plans are two of the best options for parents of kids who may someday go to college.
Custodial accounts
One strategy parents can use for college savings is a custodial account. It’s an investment account that a parent or other adult can start on behalf of a child in their life. The child will take over the account at a certain age—usually either 18 or 21.
You should read all details of a custodial account before opening one for your child. There may be gift taxes involved, and the child may also need to pay taxes on earnings eventually. But one great thing about custodial accounts is that they don’t need to be used only for college.
A custodial account can be great if you want to keep options open for your child. In case they decide to pursue an alternate path like the military or opening their own business right after high school, this might be more useful than a 529 plan.
529 plans
A 529 plan is often considered the top investment vehicle for parents to help send their kids to college. If you’re a parent, you can open a 529 account for your child very early and let the funds grow until they’re ready to hit the campus.
There are great tax advantages to 529 plans. The earnings in the account are tax-free as long as you only withdraw the money for eligible educational expenses. The longer your money is invested, the better the returns you can earn on your money, meaning your savings will stretch farther.
So a part of your 70-20-10 budget can involve saving for your kid’s college education. Remember in this budget, you’re contributing from the 20% bucket to the college fund. You might only use 5% of your income here but stick to that 20% maximum.
Stock investments
Investing in the stock market is another avenue for you to start building wealth. It’s best to focus on other steps first, such as your emergency fund and investing in an employer-sponsored retirement account. But investing on your own in the stock market is another option, if you’re at that point.
You can try your hand at more stock investing by signing up with a robo-advisor, which picks your bundle of stocks to buy based on the information you give them. It’s a great starter way to invest money in the stock market.
Another means of getting some money into the stock market is with index funds. Index funds are a way of investing in a basket of stocks or bonds that are meant to perform similarly to the overall stock market. In other words, you invest in the fund in order to hold a piece of multiple companies, hoping to earn good returns on your money because you have a variety of companies’ stock.
As you prepare to dive deeper into the work of stock market investing, check out these investment terms you should understand!
Real estate investments
If investing in real estate sounds intimidating, it doesn’t have to be that way. Although real estate investment can include buying a property to rent out for income, people can now invest in real estate in smaller ways.
Real estate appeals to some investors because, unlike the stock market, real estate is a tangible asset. It’s an actual piece of property that will theoretically always have some value.
As a beginning in real estate, you might put some of your saved money into a real estate investment trust, or REIT. This is similar to investing in the stock market, but in companies that specifically work in real estate. The process for you as an investor is much like that of buying index funds, which is easier than buying a property and becoming a landlord.
Crowdfunding is another easy way to dip your toes into real estate investments with your 70-20-10 budget.
Of course, you may be ready to pursue buying physical real estate, which can be a good option as well. Be sure to do plenty of research, as it’s not a truly passive form of income and not for everybody. But owning property can be a lucrative way of building your wealth over time.
10% of your income is for debt payoff or giving
In the 70-20-10 budget, the final 10% of your money is earmarked for giving. This may mean donations to charity or gifts to loved ones for weddings and graduations and the like.
Debt payoff
Depending on your finances, you could include debt within this 10% category. However, this doesn’t mean you can only spend less than 10% of your income on paying off loans. You might remember that student loans and other debts were included in the 70% expenses category.
Your student loans and other debts are obligations, so you want to include the minimum required payments in your spending. In addition, if the minimum payments aren’t getting you out of debt fast enough, you can send extra money to speed up that process.
You get to choose how to calculate this final 10% of your income. If you are facing a lot of debt, you could focus primarily on that rather than giving. In particular, if your debt comes with a high-interest rate, it’s a good idea to pay it off quickly.
If you’ve carried a lot of debt, you probably have experienced some levels of debt stress. Figuring out the right game plan for you can help you get on the path to debt freedom.
Debt snowball method
One popular method for debt payoff is known as the “debt snowball.” Popularized by many personal finance influencers, the debt snowball means you pay off your debts in order, smallest to largest.
The snowball is all about emotional wins. When you have a large amount of debt, it can feel suffocating. You might think you’ll never break free.
So the magic of the debt snowball is that you start with the smallest of all your debts, no matter what the interest rate is. That may mean paying off a $75 parking ticket first. That may be small, but that gives you a feeling of accomplishment.
Each time you pay off a debt, you can be proud of yourself and gain motivation to face the next debt. It takes time, but those little wins can fuel your drive to keep going as the debts grow larger.
Debt avalanche method
Some people praise the debt avalanche method of debt payoff. It’s similar to the debt snowball, except that it focuses on the interest rate of each debt versus the amount of each debt. Your interest rate on a debt is how much you’re being charged by the lender to borrow their money. The higher the interest rate, the more you’ll pay overall.
With the debt avalanche, you want to look at all of your debts and check the interest rate on each one. Then, focus any extra money you can on paying off the highest-interest debt first. For many people, this is credit card debt.
With the debt avalanche, you should end up paying less overall. However, you might grow discouraged if it takes a long time to pay off your highest-interest debt. Which debt payoff method to use can depend on your personality and what method will help you to succeed.
Keep in mind, when using the 70-20-10 budget, your minimum debt payments come out of your spending category. The extra 10% category for debt involves extra payments to get out of debt quicker.
Giving or sharing
A part of your final 10% category can go towards giving to something that has meaning to you. This can be a formal type of giving, with regular amounts every month to the same organization, or you might like to vary your giving month to month.
Religious tithing or giving
Many people make giving to their house of worship a priority. Some religious traditions call this a “tithe” (which simply means a tenth of your money). But whether you give a full 10% to one church or religious organization is really up to you.
Donating to charitable causes
Another part of your giving may be in the form of donations to charities or nonprofit organizations. You can choose one with a mission that resonates with you, whether that’s helping victims of domestic violence, digging wells in Kenya, feeding the hungry in your hometown, or one of the hundreds of other causes.
Advantages of the 70-20-10 budget
So, what are the main benefits of using a 70 20 10 budget to manage your finances? Let’s talk about some of the primary reasons you might like this budgeting method.
The 70-20-10 budget is simple to use
The 70 20 10 budget is pretty simple to understand and use. Keeping only three basic categories can make budgeting feel less like a chore and more doable, especially if you hate budgets.
Spending, saving, and giving are generally the three main categories people talk about when it comes to finances. Sure, there are plenty of ways to divide up those areas, but starting from those broad sections might make budgeting feel manageable to you.
Less restrictive than other budgets
A 70-20-10 budget might work for you because it can feel less restrictive than other budgets. Other budgeting tools or programs may require you to make thirty different categories for your money and keep track of every single penny you spend.
The 70 20 10 budget gives you a general framework that can help you organize your money. But it gives you a lot of freedom within the framework. Spending 70% of your income, you can divide up the spending categories any way you like.
Disadvantages of the 70-20-10 budget
As with most things, the 70-20-10 budget might not work for everyone. Here are a couple of negative aspects of this kind of budget strategy.
Some prefer a more detailed budget
You may have read the above section and thought the 70-20-10 budget is just too simple for you. You may prefer breaking down all of your income and spending in a much more detailed and specific manner.
If you think your personality fits better with more strict, detailed planning, then try a more complex budgeting template. The goal here is to get better with your money, not to fit yourself into a mold that isn’t right for you.
Not everyone can live on 70% of their income
Now, here’s a tough truth about finance: for some of us, 70% of our income isn’t enough to live on. If your income isn’t at a level that allows you to pay the bills on 70%, then this budget won’t work.
You could also try to adjust this plan a little bit if income is tight. Perhaps an 80-10-10 budget would be a good alternative (spend 80%, save 10%, give 10%).
The 70-20-10 budget can be good for a lot of people, but when you’re struggling to pay the bills, you likely won’t be able to save 20% or give 10%. And that’s okay.
Give the 70/20/10 budget a try!
By now, you probably have a good idea of whether you like this 70-20-10 budget. It’s a fairly simple and straightforward method of budgeting. Consider the type of budgets you may have tried in the past, and think about your financial goals as you decide.
Going through your current financial situation can help you to create a financial plan. Your money is too important to leave up to chance, so give it a shot and try some new budgeting ideas.
You might like the 70-20-10 budget, or find a different approach to managing your money. There are several other different budget styles to try out including the following:
Learn how to create a budget that's best for you with our completely free budgeting course! Also, tune in to the Clever Girls Know podcast and YouTube channel for tips on all things personal finance!