What Is the 70-20-10 Budget and How Can It Work for You?

Do you consider yourself a budgeting expert or are you easily swayed by flash sales and influencer endorsements? With interest rates continuing to rise, you’ll need to budget better to cover all the extra money you’ll be spending monthly on credit card bills, mortgages, and car loans causing additional financial stress.

If personal finance isn’t your thing, there are formulas like the 70-20-10 budget rule to help you make better financial decisions and allocate your income.

The 70-20-10 budget rule is a personal finance guideline that helps individuals better manage their money and reach financial goals. The rule suggests that you allocate your after-tax income like this:

• 70 percent for living expenses and necessities
• 20 percent for short-term savings and debt repayments
• 10 percent for long-term savings and donations

Let’s find out if the 70-20-10 budgeting rule is right for you and how it can help in reducing expenses and automating savings.

Spend 70 percent of your money on expenses: It doesn’t matter the expense, but you may want to split expenses into fixed and variable costs so you know what you have to pay each month.

Fixed expenses can include rent or your mortgage, utility bills, car payments, insurance, loans, memberships, transportation, and child care. Some examples of variable expenses include clothing, hobbies, travel groceries, and household necessities.

So, if your monthly salary is $5,000 after taxes, you’d put $3,500 to expenses each month and spent $42,000 per year.

Spend 20 percent of your money on savings: To reach your financial goals you’ll need to start with small contributions and pay off debt. Examples of the savings category include committing money to student loans, a credit card bill, high-yield savings account, a CD or a money market account.

If your salary is $5,000, you’d allocate $1,000 a month to savings and in a year, you’d spend $12,000.

Spend 10 percent on donations: While it says donations, the money should be contributed to your future like an IRA, 401(k) or other long-term savings. It can also be allocated to charitable giving.

If your salary is $5,000, you’d allocate $500 a month and $6,000 a year.

By creating a budget, it's easier to build an emergency fund, save money, pay down debt, manage discretionary spending, and build healthy credit which will benefit your financial health in the long term.

But some common mistakes and downsides to the 70-20-10 budget rule include difficulties in squeezing out 20 percent for savings and 10 percent for extra debt. If you’re living paycheck to paycheck, it’ll be hard to find an extra 30 percent a month. And if you tend to overspend on impulse buys, you should consider a more structured budget.