If you want to get control over your finances but have many expenses, the 70/20/10 rule budget can be a good start for your financial freedom.
I used this budget when I moved to London and had two part-time jobs. Since my income was not high and I had a lot of expenses, this budgeting method made sense at the time. So I do feel it did help me to avoid unnecessary debt.
The 70/20/10 rule budget is very effective (it can be a lot more effective than other budgeting methods) because it allocates a lot of the money to living expenses, which is where most people spend their money.
Before you start on the 70/20/10 budget, let's explore what it consists of, if you should try it, and see examples to understand it better.
What Is The 70/20/10 Rule Budget?
Like any budget method, the 70/20/10 is based on percentages and focuses on three different categories:
- Expenses – You will spend 70% on living expenses which you can split into fixed and variable.
- Savings – You will save 20% of your salary to build your savings or pay off debt.
- Investing – You will spend 10% of your budget investing your money or donating it.
I want to make a note when it comes to the 20% (savings) and the 10% (investing). I have seen many other people advising differently on what to do with these categories. Some examples:
- 20% for your savings (you save the money but don't pay a debt), and 10% exclusively for paying the debt.
- 20% to pay the debt and 10% for the savings.
- 20% for your savings and pay the debt, and 10% to do something fun.
As you can see, everyone agrees that 70% of your income is for living expenses, but for the other 30%, you can choose what to do. I advise you to allocate 20% to savings and debt and invest 10% on something smartly. Always think about the long term when it comes to investing.
Who Is The 70/20/10 Rule Budget Ideal For?
The 70/20/10 rule budget is excellent if you have many expenses and can't allocate a significant percentage of your paycheck to other categories.
This budgeting method is excellent for people that never budgeted before and want to start it. However, if you desire to save more money than spending or to pay massive amounts of debt, the 60/30/10 rule budget will be a better fit.
The 70/20/10 rule budget is excellent for you if you:
- Have a lot of expenses
- Live paycheck-to-paycheck
- Never budgeted before
- Want a simple budget method
I read someone saying the 70/20/10 budget is excellent for everyone who doesn't want to micromanage their money. I disagree with this statement because when it comes to budgeting your money, you need to micromanage it at the beginning to understand every single expense you have. You can't just say £2,500 will go for costs without knowing exactly which amount is rent, bills, or fun.
If you want to say you have $200 every month to spend on fun without specifying what type of fun, I do agree you don't need to do that, but you can't spend more than that if your budget says so.
How To Budget Your Money With The 70/20/10 Rule Budget?
Now that you have an idea of what the 70/20/10 budgeting method consists of and if it’s ideal for you or not, let me explain more in-depth all three categories.
Spend 70% Of Your Money On Expenses
70% of your salary after-tax will be allocated to the expenses category, which englobes all the expenses you have. It doesn't matter what type of expense it is (this method doesn't separate your needs from your wants). The type of expense can be something that would be difficult to live without to something that is not essential, but you have joy consuming.
You don't need to do this, but I like to split my expenses into fixed and variable costs. This way, I know what I always have to pay every month, no matter my income. With the variable expenses, you can always spend a little less and save it or invest if you prefer (imagine you choose to not spend so much money in April and May with your variable expenses and allocate that amount to your savings to go on holidays in June or July)
A few examples of what is considered to be part of the fixed expenses:
- Utility Bills (Water, Gas, Electricity)
- Car Payments
- Transportation (monthly pass)
- Memberships (gyms, professional organizations)
- Entertainment Subscriptions
- Child Care
A few examples of what is considered to be part of the variable expenses:
- Household Products
- Date Nights
- Transportation (monthly fuel)
If your salary is $2,000 after-tax, that means you would allocate $1,400 to expenses each month. In 12 months, you would have spent $16,800.
Spend 20% Of Your Money On Savings
20% of your salary after-tax will be allocated to the savings category. This is a great way to start planning financial goals you want to achieve with small contributions. It doesn't matter if you're going to save money for a specific reason or if you wish to pay different debts.
It's essential to save money for a specific goal or have an emergency fund set if you lose your job or have an emergency as your car broke. Unfortunately, according to Bankrate, over 50% of Americans have less than three months' worth of expenses covered in case they have an emergency, and around 25% don't have an emergency fund at all.
A few examples of what is considered to be part of the savings category:
- Debt Payments
- Emergency Fund
- Buying a House
- Starting a Business
- Retirement Contributions
- College Savings For Kids
If your salary is $2,000 after-tax, that means you would allocate $400 to savings each month. In 12 months, you would have saved (paid debt/or both) $4,800.
Spend 10% Of Your Money On Investing
10% of your salary after-tax will be allocated to the investing category. When done correctly, investments can make you more money and help you reach big financial goals. If you have a higher interest rate, the investment is even better.
Of course, investments bring many different risks, and you shouldn't do it yourself if you’re unsure which investments are suitable for you. Check with your bank if they have someone that can provide personalized advice on a range of different portfolios (my bank has someone who invests my money and manages my portfolios in different risk funds).
You can also donate 10% of your salary to a cause you feel really passionate about it. Just ensure you are financially stable before you start giving to others (I waited until I had at least a year of savings to live on in case I lost my income). Can you imagine how good you would feel to arrive at one point in your life where you could give back to others because you are financially secure?
A few examples of what is considered to be part of the investing category:
- Stock Investments
- Real Estate Investments
- Mutual Funds
If your salary is $2,000 after-tax, that means you would allocate $200 to investing each month. In 12 months, you would have invested (paid debt/or both) $2,400.
How Do You Set Up The 70/20/10 Rule Budget?
If you decide you want to move forward with a 70/20/10 rule budget, here’s how you can set one up.
1 – Calculate Your After-tax Income
So, the first thing you want is to calculate your after-tax income and know how much money you will receive every month. Some people receive the same payment every month, but for others, it can vary, which makes budgeting a lot more complicated (but not impossible). If you are a freelancer, calculate how much money you expect for the next month. Some people get paid weekly and some biweekly, so you must adjust your budget according to your situation.
You can use the free tool on the IRS website to help you determine how much income you can expect to receive and how much taxes you will pay. However, if you have any questions, it would be better to speak with a tax professional.
2 – Use The 70/20/10 Template/Spreadsheet
To keep you organized and to have a better perspective of what you need to do, ensure you use the 70/20/10 template. It can be a spreadsheet that you print and use/fill online or an excel sheet. Whatever makes your life easier, it’s what you should use. Don't forget your partner's income and expenses, and check the best personal budget categories for you.
I love excel sheets, but some people prefer to have a printed spreadsheet where you can quickly look at all your expenses and how much money you have allocated to each category. Learn how to make a budget in excel.
3 – Categorize Your Spending From Last Month
Now you need to split all your income between the categories of expenses, savings, and investing. Again, try to be the most specific possible to have a clearer idea of your expenses (or just go general if you want, since this method allows that). Check your bank statement from the last month, and you will be fine.
You can put all your fixed expenses straight away on the sheet, like rent/mortgage, subscriptions, loans, or check your bank statement and check every single expense and allocate to one specific category.
You should also know how much money you allocate to each category from your income. Again, you can find out by doing these maths (you can check the examples section to understand better how to do it).
70%= Income x 0.70 = amount for your expenses
20%= Income x 0.20 = amount you will save
10%= Income x 0.10 = amount you will invest
4 – Set Up Your Financial Goals
Once you determine how much income you will receive, how much it’s allocated in each category, and all your expenses are categorized, you need to set financial goals.
In my opinion, no budgeting is worthing if you don’t have the motivation to keep yourself moving forward and achieve what you purposed at the beginning of each month. You need to set some financial goals for each month or even for an entire year or five years. I gave you some ideas above of what your objectives could be. Some examples are buying a house, paying an immense debt, or creating an emergency fund. You also need to know why you want to invest your money.
You didn’t set your financial goals at the beginning because you didn't know your income and expenses. Now you can set realistic financial goals because you know your monetary situation.
5 – Evaluate And Adjust Your Spending
Finally, you will need to evaluate and adjust your personal budget or family budget at two different moments. First, you will check your spreadsheet and see if you need to make any adjustments to ensure you respect the percentages of each category and don’t overspend. The second time you need to evaluate it’s at the end of each month and see what went right and wrong and make more adjustments.
Every month you will need to evaluate and adjust your budget. Don’t get discouraged if you fail or it doesn’t go like you wanted because you will not get everything perfect on the first attempt. Even the more experienced budgeters like me still make mistakes after years of budgeting. You may need to try a different budgeting method.
70/20/10 Rule Budget Examples
The average American earns approximately $51,480 gross per year in the USA, equivalent to $4,290 gross per month. So that’s the value I will use in one of the examples. I decided to use one example where someone earns $2,500 before taxes, in case you receive less than the average American.
Note: For your information, I have researched a lot about how much the average American pays for rent, bills, groceries, etc. However, it would help if you kept in mind that it varies significantly from each state. These examples are only for you to understand better how the 70/20/10 rule budget works.
The first example is for a single person who splits a house with someone that is not their partner and has no kids.
As you can see in the example, all the money is allocated according to the 70/20/10 percentages for each category. You can have all expenses together or split them as I did in fixed and variable. You can also go into as much detail as you like. For example, I have put utility bills, but you can describe them as water bills, electricity bills, etc.
You can (and should, in my opinion) be as specific as possible. You can start the 70/20/10 budget precisely as I did it above, and every month try to go into more detail in each subcategory. For example, in Household Products, you can specify what you will need for the month (floor polish, laundry powder, paint thinners, etc.) according to the budget value.
If you’re budgeting your money and your partner’s salary as well, you can check the 70/20/10 rule budget example for two incomes. Remember that you merge the two salaries into one and use that amount to budget your money for the month.
Is The 70/20/10 Rule Budget Good For You?
If you want a budget that is heavily focused on your expenses, the 70/20/10 rule budget is perfect for you. If you have a lower income, this budgeting style can help you save and invest part of your income.
However, putting aside 30% of your income can be complicated every month, especially if you are just starting to budget. So keep adjusting the percentages if you need them till you find a way to do the 70/20/10 work for you.
Remember that trying to budget your money is just the first step in a long-term process to achieve control over your finances.
Michael launched Wealth of Geeks to make personal finance fun. He has worked in personal finance for over 20 years, helping families reduce taxes, increase their income, and save for retirement. Michael is passionate about personal finance, side hustles, and all things geeky.