Set aside 70% for essential expenses: 

A majority of the money you make should be used for the essentials in your life. Things needed to maintain a standard of living fall into this bucket. Monthly rent, groceries, utilities, any commuting costs, or insurance/credit card payments all fall into this category.

Tracking your budgets with a budgeting app allows you to see if you’re overspending in certain areas. Let’s say you’re spending too much on your cell phone bill. An app like Hiatus can negotiate this bill on your behalf to get better rates for you.

Use 20% on savings and investments

The 20 in the 70-20-10 money rule is used either for savings or investments. That’s right, you will set aside 20% of your income and build up an emergency fund in case you need it later on for something unexpected. Whether you lose your job or rack up $10,000 in credit card debt 20 years from now (let’s hope not), it's beneficial to have money somewhere that can be used in case of an emergency. 

Investing this money in the stock market, or in mutual funds can help set you up for the future. Even a high-yield savings account isn’t a bad option since the money will compound and make you more money.

The last 10% spent on debt payments or donations

The last 10% of your budget will go towards paying additional debt. If you’re asking if we already accounted for credit card payments in the 70% bucket, the answer is yes. However, the quicker you’re able to pay off any outstanding debt you might have, the less interest you’ll wind up paying. 

Most budgets don’t include donations in the budget, but this one does. Let’s say you hold a particular charity near and dear to your heart, or even your alma mater, some of the money in this budget is allotted for those types of things as well.

Putting The 70-20-10 Budget To Use

Talking about budgets is one thing, but putting them to practice is another. The first thing you’d need to do is start by figuring out what your monthly income is after taxes. Let’s say you make $4,000 a month after taxes, the 70-20-10 method would have your money looking like this:

• $2,800 is used for your living expenses (70%)

• $800 should be invested in something or deposited in to a savings account (20%)

• $400 on extra debt payments or used for donations  (10%)

Managing and executing your budget requires the proper commitment and planning. It can be easy to say you’ll only spend a few extra dollars here and there just one time. Before you know it, it can become a consistent occurrence and your budget will take a big hit.

Why Use a 70-20-10 Budget

Budgeting is meant to simplify your financial life and help you from overspending your money. For people who are just starting to budget, the 70-20-10 budget is great. Here are some of the benefits to this type of budget. 

Simplicity: Being a quite simple budget with three buckets, you’ll know where and how much of your income is going to be allocated. This will provide financial stability and leave you with a peace of mind instead of having to worry each month about how to manage your money. 

Creating Long Term Wealth: Since 20% of the budget is put towards investments or savings, another benefit to using the 70/20/10 budget is that you’re creating long term wealth for yourself. Most high yield savings accounts or investments will accumulate over time, ensuring that your money grows. Those big time purchases that seem like a long-shot can become that much more realistic. 

Help Reduce Your Debt: The last 10% of this budget is meant for increasing your payments on certain debts so that you can become debt free sooner. Paying debts faster will decrease the amount of interest you’ll need to pay on them.

Building an Emergency Fund: Since part of the budget sets aside money for emergencies, the financial stress from any unexpected situation will be accounted for. Medical emergency? That’s not a problem, you already have money saved in case of that. 

Downsides to the 70-20-10 Budget

Some budgeting strategies also come with their flaws. Here are some of the negatives to the 70/20/10 budget.

What About My Money: You may have asked yourself “what money can I use for myself?” since all of the money was accounted for but yet none was set for “personal spending.” To some people, there’s great value in being able to see a percentage or number of how much money they’re allowed to spend on themselves. At the end of the day, you do need to enjoy your hard earned money a little bit.

Easier Said Than Done: While the simplicity of the budgeting strategy is valid, it is definitely harder to pull off and stick to. Especially for those who are just starting out with a budget, having 30% of your income might be too big of a number to abide by when starting off. Starting at a lower number and working your way up is probably a bit more practical.

How To Prepare For A 70/20/10 Budget

Before you start creating your budget, you’ll need to do some work beforehand to see how much money you’re actually working with. First, you should look at your last few months to truly determine how much money you have coming in and going out.

Next, categorizing each expense will help you gain a better understanding of what is a necessity and what can be deleted. Finding those pesky charges that you may have forgotten about can be eliminated altogether and that money added to your budget. Subscription services are a big one and the Hiatus app can also help you cancel subscriptions straight from the dashboard. 

Once you’ve gotten all that taken care of, you can start to break your income down into those three buckets. Setting up automatic deposits will help streamline your budget and make life easy. Take 20% of your income and put it from your checking to savings accounts and investments. Next, set up another automatic transfer and put 10% which will go towards donations/ extra debt payments. The remaining 70% in your checking account will be used on the essentials.

Being Flexible With Your Budget

It’s important to remember that the 70 20 10 budget isn’t something set in stone. It’s a guideline and important to adjust the budget based on each person’s circumstances. Some people may need to allocate more than 10% of their income towards debt repayments to get back on track. It’s key to make sure you find the right balance that works for you and will also help you achieve your goals.

Is this budget right for you

Following the 70/20/10 budget rule will certainly help you get a better grasp of your finances and help build a solid foundation for your future. Try out this budget and see if it works for you. If not, there are a variety of other budget strategies that will help you achieve your goals as well!