A good spending plan doesn’t need to be overly complicated. The 70/20/10 budget rule offers a straightforward approach to managing your money, helping you balance essentials, and enjoyment without the stress.
This method makes budgeting more manageable by dividing your after-tax income into three easy-to-follow categories. It ultimately supports your financial well-being.
What is the 70/20/10 budget rule?
The 70/20/10 budget rule breaks down your after-tax income into three key areas: 70% for essential living expenses, 20% for savings and debt repayment, and 10% for personal spending.
This system gives you a clear, actionable framework for handling your finances, ensuring your needs are covered, your future is secured, and you still have room for some fun.
With this method, you put your essentials first and allocate the largest portion of your monthly income towards the things you need. After that, you focus on savings and paying off any debts you may have. Finally, the remaining portion of your income is dedicated to personal wants, allowing you to enjoy life’s pleasures without derailing your financial goals.
70% for needs
The bulk of your budget — 70% — covers your essential living expenses. These are the costs you pay to maintain a comfortable and functional lifestyle. Understanding what counts as “needs” is essential to managing your money effectively.
Housing: This is typically the largest expense. This includes rent or mortgage payments, property taxes, and home insurance. It’s important to ensure that your housing costs fit within 70% of your income to avoid financial strain.
Utilities: Costs like electricity, water, gas, internet, and phone bills are non-negotiable. Keeping track of these expenses and looking for affordable plans can help keep them under control.
Groceries and household supplies: This portion should cover everything from food to cleaning and personal care products. Meal planning and sticking to a shopping list can help manage these costs without sacrificing quality.
Transportation: Your transportation costs include car payments, fuel, maintenance, or public transit costs. Being mindful of how much you spend on getting around can help reduce unnecessary expenses.
Insurance premiums: Factor in health, auto, and other coverage costs. These policies are there to protect you from financial hardship in case of emergencies.
Dedicating 70% of your monthly income to these essential needs ensures that your basic living costs are fully covered. Reviewing and adjusting your spending regularly will help you stay on track.
20% for savings
The next 20% of your income goes toward building your financial future. This includes creating an emergency fund, saving for retirement, and paying off debt. This portion of your income is used to ensure long-term stability.
Emergency fund: Dedicate a savings account to hold money for unexpected expenses like medical bills or car repairs. Aiming to save enough to cover three to six months of living expenses can provide peace of mind during financial setbacks.
Retirement savings: Contributing to retirement accounts like a 401(k) or IRA ensures you're better prepared for the future. Starting early will allow you to take full advantage of compound interest, growing your savings over time.
Debt repayment: Paying down high-interest debt — like credit card debt — can help you save money in the long run and free up more of your income for savings and investments.
Investments: If you can, investing in stocks, bonds, or other financial assets can grow your wealth. Diversifying your investments spreads out risk and helps maximize potential returns.
Setting aside 20% of your income for savings and debt repayment helps you secure your financial future and reduce the stress of unpaid bills or retirement planning.
10% for wants
The final 10% of your income is designated for discretionary spending, expenses that bring you joy but aren’t essential. While you can’t prioritize this over your needs and savings, it’s important to enjoy life along the way.
Entertainment: Whether it’s going to the movies, attending a concert, or subscribing to streaming services, setting aside a specific budget for entertainment helps you enjoy leisure activities without guilt.
Dining out: From casual meals to special nights out, allocating part of your budget for dining will allow you to enjoy food experiences while maintaining control over your overall finances.
Hobbies and interests: Whether you enjoy sports, crafts, or gaming, putting money aside for the activities you love makes it easier to pursue them without financial stress.
Travel: Exploring new places or taking vacations can enhance your life. With careful planning, you can fit travel into your budget without overextending yourself.
Non-essential purchases: New gadgets, fashion, or home décor fit here. Before making these purchases, consider if they align with your financial goals and if you can afford them within the 10% allocation.
By setting aside 10% of your income for personal spending, you allow yourself the freedom to enjoy life’s pleasures without compromising your financial health. It’s about balance — you can spend money on enjoyment while staying on top of your financial goals.
Benefits of the 70/20/10 budget
The 70/20/10 budget rule offers several benefits that can improve your financial situation. It simplifies your money management, encourages positive habits, and provides a balanced, stress-free approach to budgeting.
Promotes financial discipline
One of the primary advantages of the 70/20/10 budgeting rule is that it encourages financial discipline. You create clear spending boundaries by allocating specific percentages of your income to different categories. This can help you avoid overspending and encourage you to be more mindful of your finances.
What makes the 70/20/10 method work so well is its simplicity. Unlike other budgeting systems, you don’t need to track every small expense. Instead, you only need to ensure you’re within the set percentages. This straightforward approach can reduce the stress often associated with budgeting, making it easier to stay on track.
With consistent use, you can build strong financial habits. Regular saving, smart spending, and prioritizing essentials over luxuries can become second nature. This discipline will help you create a more stable financial future and stay focused on long-term goals.
Encourages savings growth
You can steadily build toward financial security by dedicating 20% of your income to savings and debt repayment. This portion of your budget goes directly toward creating an emergency fund, investing for the future, and paying off high-interest debt. Over time, this habit of saving helps accumulate wealth — especially when you take advantage of compound interest on your investments.
A solid savings strategy can also reduce financial stress, as it helps ensure you’re prepared for the unexpected. With your savings growing, you can open up opportunities for larger financial goals, like buying a home or starting a business. Plus, consistently saving and reducing debt helps you become more financially resilient in the long run.
Provides flexibility for personal spending
The 10% allocated for personal wants allows you to enjoy life while maintaining financial control. It’s a reminder that life isn’t just about saving — it’s also about enjoying the present. This portion of your budget lets you treat yourself without guilt, which is an important part of maintaining a sustainable, long-term budget.
Having a set amount for discretionary spending encourages you to make intentional choices. Whether it’s dining out, traveling, or spending on hobbies, this portion allows you to prioritize the experiences and purchases that add value to your life.
The flexibility of the 10% allocation also helps you avoid the burnout that can come with overly strict budgets, helping you stick with it long-term.
How to implement the 70/20/10 budget in your life
Putting the 70/20/10 budget into action is simple but requires ongoing effort. Start by evaluating your income and expenses, adjust your spending habits as needed, and keep track of your progress to make sure you're staying on track. Here's how to get started:
Assessing your income and expenses
Start by calculating your total after-tax income. This is the money you take home each month after deductions, including your salary, wages, freelance income, or earnings from investments. Knowing exactly what you have to work with is crucial for setting a clear budget, no matter what method you use.
Next, track your current expenses. Break them into three categories: needs, savings/debt repayment, and wants. This will show you where your money is going and highlight any areas where adjustments are needed to match the 70/20/10 structure.
Using a budgeting app like Albert can make this process easier. Albert can track your spending automatically and give you insights into your spending habits so you can easily identify areas to improve.
Adjusting your spending habits
Once you’ve assessed your finances, you might find that your spending isn’t aligned with the 70/20/10 rule.
If more than 70% of your income goes toward needs, look for areas to cut back. This might mean downsizing your living situation, switching to more affordable utility plans, or exploring cheaper transportation options.
If you’re not saving 20% of your income, try to find ways to boost your savings. This could involve reducing your “wants” spending or finding additional sources of income. Scheduling your savings is a great way to stay consistent, and make sure you're setting aside money each month by transferring a fixed amount to a savings or investment account.
If you're overspending in the "wants" category, review your discretionary spending and consider where to cut back. Focus on the activities and purchases that truly bring you happiness, and trim unnecessary items that don't add significant value.
Tracking your progress and making adjustments
Regularly check in with your budget to see how well you're sticking to the 70/20/10 plan. Keeping tabs on your spending and savings will help you stay on track and give you the chance to make adjustments as needed.
If you're struggling in a certain area, take a step back and figure out why. Did an unexpected expense pop up, or were your estimates off? Use these insights to refine your approach and ensure your budget aligns with your goals.
Celebrate your wins along the way, too. Recognizing your progress will keep you motivated, whether you reached a savings milestone or knocked down a bit of debt. Remember, budgeting is an ongoing process, and it’s okay to adjust as your financial situation evolves.
Common challenges and how to overcome them
While the 70/20/10 budget is straightforward, facing challenges when implementing it is normal. Here are some common hurdles and strategies to help you stay on track.
Dealing with irregular income
If your income fluctuates month-to-month, sticking to fixed percentages can be tough. To handle this, base your budget on your average or lowest expected income, ensuring your essentials are always covered.
When you earn more in a given month, direct the extra funds towards your goals or debt repayment.
Budgeting apps designed for those who earn variable income can make things easier. Many apps allow you to adjust your budget based on your actual earnings, keeping things flexible and manageable.
Balancing needs and wants
It’s not always easy to tell the difference between needs and wants. Some expenses might seem necessary but are actually discretionary. For example, while internet access is essential for most people, multiple streaming subscriptions are a luxury.
To better handle this, evaluate each expense in your budget. Ask yourself if it’s critical to your daily life or financial stability. Being honest about what you’re spending on will help you prioritize better and stay within your budget.
Focus on the essentials first and make thoughtful decisions about allocating funds for things that bring real value.
Staying motivated to save
Consistently saving can be hard, especially when there are tempting spending opportunities all around.
Having clear, specific financial goals can help keep you focused and motivated. Whether you want to build an emergency fund, save for a down payment on a home, or plan for a vacation, having a target will give your savings a purpose. This, in turn, gives you a reason to stick to the plan.
Track your progress and celebrate small wins to keep your momentum going.
Finding financial balance with the 70/20/10 budget
The 70/20/10 budget rule is a simple approach to managing your money and spending habits. By dividing your income into three categories, you ensure your essential needs are covered, you’re saving for the future, and you can spend on what brings you joy — without guilt.
This method promotes financial stability and encourages disciplined spending. It’s simple enough for anyone, even beginners, to use, making budgeting less overwhelming and more achievable.
If you're looking for an extra boost to make budgeting easier, Albert can help you track your income, manage your expenses, and track your spending to see progress towards your goals. This can help guide you toward smarter financial decisions and simplify money management.
⚡️ Try Albert today to simplify your budgeting journey.