Managing money can feel overwhelming, especially when you’re trying to balance bills, savings, and unexpected expenses.
Often, the issue isn’t low income but a lack of a clear plan. That’s where simple budgeting rules, like the 70/20/10 money rule, help.
This rule divides your income into spending, saving, and debt repayment or investment, making it easier to track your money and reach your financial goals.
A Bankrate survey found that only 29% of Americans reviewed their budgets between mid-February and mid-March, underscoring how easy it is to lose track without a system.
In this article, I’ll walk you through what the 70/20/10 money rule really means, how to apply it in your everyday life, and why so many people are turning to it to reach their financial goals faster.
Key Takeaways
- The 70/20/10 rule divides income into clear, manageable portions: 70% for spending, 20% for saving, and 10% for giving or debt repayment.
- It helps you stay organised, avoid budgeting mistakes, and achieve long-term financial goals.
- Consistency and flexibility are the keys to making this rule work for any income level.
Understanding the 70/20/10 Money Rule
The 70/20/10 money rule is a budgeting formula that divides your after-tax income into three main categories:
- 70% for living expenses
- 20% for savings or investments
- 10% for debt repayment or charitable giving
The idea behind this budgeting approach is balance. You get to cover your essentials, build a secure financial future, and still give back or pay off debt faster.
Unlike complex budgeting systems that require tracking every small expense, the 70/20/10 money rule keeps things simple and realistic.
How to Apply the 70/20/10 Rule
Applying the 70/20/10 money rule means learning how to divide your income in a way that fits your lifestyle and goals. Let’s break it down.
1. Allocating 70% for Expenses
The first part of the rule is to dedicate 70% of your income to your living expenses.
This includes everything you need to survive and maintain a decent standard of living, such as rent, groceries, transportation, healthcare, utilities, and personal essentials.
For example, if you earn $3,000 per month after taxes, $2,100 (70%) should go toward your monthly expenses.
However, the key is not to overspend within this range. If your spending exceeds 70%, you may need to cut back on non-essential costs.
Budgeting is important here because it helps you identify where your money goes and what changes you can make to stay within your limit.
Avoiding budgeting mistakes, such as underestimating bills or forgetting small recurring costs, can help you stay consistent with this plan.
2. Saving 20% of Income
Next, allocate 20% of your income toward savings and investments. This portion focuses on securing your financial future and achieving your long-term financial goals.
Your 20% savings can go into:
- An emergency fund
- Retirement savings (like a 401(k) or IRA)
- Investment accounts (stocks, mutual funds, etc.)
- Major life goals (buying a home, education, or travel)
If you’re just starting, your first goal should be to build an emergency fund that covers 3-6 months of expenses.
Once that’s done, move on to investing and saving for retirement.
This 20% allocation gives you peace of mind, knowing you’re preparing for the future rather than just living for the moment.
3. Using 10% for Extra Debt Repayment or Giving
The last part of the 70/20/10 money rule dedicates 10% of your income to debt repayment or charitable giving.
If you have existing debts, such as student loans or credit cards, use this portion to pay them off faster.
Reducing debt improves your credit score and frees up more income for future savings.
If you’re debt-free, you can use this 10% to give to charity, support family, or invest in personal growth, whatever aligns with your values.
How to Start Using the 70/20/10 Money Rule
Starting with the 70/20/10 money rule doesn’t require financial knowledge. Here’s a simple process to begin:
- Calculate your after-tax income: Know exactly how much you earn monthly after deductions.
- Apply the formula: Multiply your income by 70%, 20%, and 10% to get the exact figures.
- Track your spending: Use budgeting tools or a simple notebook to record where your money goes.
- Adjust when needed: If 70% doesn’t cover your living expenses, see what you can cut back on.
- Stay consistent: The more disciplined you are, the more natural budgeting becomes.
Remember, budgeting is important not because it limits you, but because it gives you control over your money.
What Are The Benefits of the 70/20/10 Money Rule?
The 70/20/10 rule offers several advantages for anyone seeking financial balance and discipline.
Some of its benefits include:
- Financial discipline: You always know how much you can spend and save, reducing the chances of overspending.
- It promotes financial confidence: You’ll never wonder where your money went because you’ll have a plan guiding every decision.
- It makes budgeting mistakes easier to identify: If you notice you’re dipping into your savings too often, you’ll know which area needs adjusting.
- It’s flexible: Whether you earn ₦100,000 or ₦1,000,000 monthly, the same rule applies, just at different scales. That’s what makes it sustainable for nearly anyone.
Difference Between the 70/20/10 Rule and the 50/30/20
The 50/30/20 rule is another popular budgeting system, and at first glance, it seems quite similar. However, there are important differences.
The 50/30/20 rule divides your income into 50% for needs, 30% for wants, and 20% for savings or debt. It’s great for people who want flexibility between needs and wants.
The 70/20/10 money rule, on the other hand, prioritises essentials more heavily, focusing on living expenses, consistent savings, and generosity or debt repayment.
It’s a more structured and disciplined approach, ideal for people who prefer stability over flexibility.
Tips to Help You Stick to the 70/20/10 Money Rule
Sticking to a budget can be challenging at first, but with consistency and the right mindset, you can make it work. Here are some practical tips:
- Start small and adjust gradually.
- Automate your savings and bill payments.
- Review your budget monthly.
- Avoid comparing your progress with others.
- Reward yourself occasionally for staying consistent.
Remember, the goal isn’t perfection, it’s progress. Every step brings you closer to financial freedom.
Conclusion
The 70/20/10 money rule is more than just a budgeting formula; it’s a lifestyle habit that builds discipline, confidence, and control over your finances.
Whether you’re saving for a rainy day, paying off debt, or simply trying to make your income stretch further, this rule offers a clear and practical roadmap.
It reminds us that budgeting is important not because it restricts us, but because it gives us the freedom to live without financial stress and achieve the financial goals we dream of.
Frequently Asked Questions
1. Who Should Use the 70/20/10 Money Rule?
Anyone who wants a simple and effective way to manage their income, save more, and avoid overspending.
2. Can I Adjust the Percentages If My Expenses are Higher?
Yes. The rule is flexible. You can adjust it to 75/15/10 or any ratio that suits your lifestyle, as long as you keep saving.
3. Which Is Better: The 70/20/10 or the 50/30/20 Money Rule?
Both the 70/20/10 money rule and the 50/30/20 rule are excellent budgeting frameworks, but the “better” one depends on your financial goals, income level, and spending habits.
4. Why is Budgeting Important When Following this Rule?
Budgeting gives you control and helps prevent budgeting mistakes, ensuring that your spending and saving align with your financial goals.
5. What If I Earn Irregular Income?
Base your budget on your average monthly earnings and adjust percentages as needed.
