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- The 70-20-10 budget is a guideline that simplifies your income distribution into spending, saving, and donating.
- The 70-20-10 budget is ideal for people who are beginning to learn how to manage their income.
- One of the disadvantages of the 70-20-10 budget is that it doesn't separate discretionary spending from costs of living.
Budgeting is a great way to gain control over your income. But with seemingly endless ways to divide your money, it can be helpful to follow one of the many budgeting guidelines out there. "It doesn't have to be a bajillion categories, and really time consuming. There are ways to make this actually digestible and easier," says Dani Pascarella, CFP® professional and the founder of OneEleven Financial Wellness.
A newer plan among these guidelines is the 70-20-10 budget, which can act as a foundation for a more detailed budget down the line. Here's everything you need to know to determine if this plan is the right fit for you.
What is the 70-20-10 budget?
Like other budgeting guidelines such as the 50-30-20 rule, the 70-20-10 budget offers a loose budgeting plan that simplifies what can be a complicated process. The 70-20-10 budget guideline divides your post-tax income into three categories: monthly spending, saving, and debt repayment and donating.
Use 70% of your income on wants and needs
Unlike most budgets, which separate your cost of living and discretionary spending into two different categories, the 70-20-10 budget condenses both into one category. Because there is no line separating your needs from your wants, it might be helpful to figure out what percent of your spending is fixed, such as rent or utilities, and work out what percent of your spending money is still available.
Set aside 20% for savings and investments
The 70-20-10 budget has you putting 20% of your income away into investments or savings. You can put your income towards an emergency fund if you don't already have one, or take advantage of compound interest through a high-yield checking account.
Not only does this guarantee you'll have money when you need it, but you'll have more income overall. This budget can be a great tool for figuring out how much you should save each month.
Keep in mind that you may already be saving pre-tax income in retirement vehicles such as a 401(k) match, in which case you may not need to save as much of the income that reaches your bank account.
Dedicate the remaining 10% for debt repayment or donations
The final 10% of your budget goes toward paying down debt or donating money. When it comes to debt, this category is for debt that isn't immediately due, like making extra payments on student loans or medical debt. On the other hand, minimum payments usually fall within your monthly expenses, like credit card debt payments or car loan payments.
The donation aspect of the 70-20-10 budgeting rule is what makes this guideline unique, as most budgeting guidelines don't have donations explicitly included in the budget. This encompasses donations to charities or causes that you believe in or donations to houses of worship or alma maters. This can also mean supporting your parents through their retirement. A 2018 Pew Research Center study found that 14% of adults living in someone else's house are a parent of the household head.
How to know if the 70-20-10 budget is right for you
Pascarella says that the 70-20-10 budget is primarily for people who are just starting to budget because of its simplicity. This is especially important when the only way to learn how to budget is by actively seeking it out.
"Most schools don't teach personal finance. So most people are in the situation where they feel like everyone around [them] knows this stuff, and [they] feel very, very silly," Pascarella says. Ideally, you should develop a more sophisticated budget plan as you move forward, but "making these simple rules makes it really easy for people to get it when they're starting out and feel like they have something to do so it's a good starting point," she adds.
The 70-20-10 budget, with its designated allowance for donations, is also appealing for the socially conscious. However, Pascarella advises that you should be financially stable before giving to others. "Once you feel secure, that's when it's time to say 'okay, now how can I give back and help others?' But if your cup isn't full, it's very hard to give to the others around you," she says.
Pitfalls with the 70-20-10 budget
Like most budgeting guidelines, the 70-20-10 budgeting rule comes with its fair share of pitfalls.
It's difficult to pull off: Though saving is important in any budget, Pascarella says that setting 30% of your income aside is very aggressive, especially for people who are only starting to budget their money. Oftentimes, people will work their way toward this budget as something more aspirational than a hard-and-fast rule. "Just know that Rome wasn't built in a day, neither was the perfect budget and savings plan," Pascarella says.
It doesn't separate work and play: As stated earlier, there's no line that divides your wants from your needs. Though this simplifies your budget, Pascarella says there's value in being able to see the percent of your income that you get to have fun with. "I think separating them out is great, because when our clients see that choice spending in that percentage, it makes you look at your budget from a place of 'wow, I worked really hard. And now I have all of these dollars to like, go do some fun things with,'" she says.
It lacks nuance: There are nuances to finances that simplified budgets like the 70-20-10 budget just aren't able to capture. Specifically, there are often debt priorities that need to be taken into account, and 10% of your income won't be enough to cover everything. For example, some people have debts with higher interest rates than others. So limiting your repayments to 10% of your income makes less sense when the unpaid debt adds onto itself with each month.
The 70-20-10 budget can be helpful as an early budgeting guideline, and it should be treated as such. If followed like law, it can become counterproductive and can turn people away from budgeting altogether.
"Every dollar you earn should get you closer to the person you want to be," Pascarella says. "And if you don't truly feel that way, then like you still have work to do with your budget."