Many people want to save more money but feel like expenses keep getting in the way. Without a clear plan, it is easy to spend too much and save too little.
The 70/20/10 Rule flips the usual budget approach by putting savings and debt repayment first. It keeps things simple while helping you build financial security faster.
What Is the 70/20/10 Rule?
The 70/20/10 Rule is a budgeting method that divides your after-tax income into three categories:
- 70% for needs and wants: This covers housing, food, transportation, entertainment, and other living expenses.
- 20% for savings and investments: This includes retirement accounts, emergency funds, and other savings goals.
- 10% for debt repayment or giving: If you have high-interest debt, this portion helps you pay it down faster. If you are debt-free, you can use it for charitable giving or other financial priorities.
Compared to the 50/30/20 Rule, the 70/20/10 approach shifts more money toward savings and debt repayment, making it popular with people focused on long-term financial growth.
How the 70/20/10 Rule Works
The 70/20/10 Rule splits your income into three main parts so you can cover expenses, save for the future, and pay down debt. Each category serves a specific purpose in your budget.
- 70% Needs and Wants: This covers living expenses such as housing, groceries, utilities, transportation, entertainment, and lifestyle costs.
- 20% Savings and Investments: This portion builds your emergency fund, funds retirement accounts, and helps you reach long-term savings goals.
- 10% Debt Repayment or Giving: This percentage goes toward paying down high-interest debt. If you are debt-free, you can use it for charitable giving or other personal priorities.
Step-by-Step: How to Use the 70/20/10 Rule
Getting started with the 70/20/10 Rule is simple. A few steps can put this method into action quickly.
- Calculate After-Tax Income: Add up your total monthly income after taxes and deductions so you know what you have to work with.
- Divide into Three Categories: Allocate 70% to needs and wants, 20% to savings and investments, and 10% to debt repayment or giving.
- Automate Transfers: Set up automatic transfers for savings and debt payments so they happen before you can spend the money.
- Track Expenses Monthly: Review your spending each month to stay within the 70/20/10 targets and adjust if needed.
Pros & Cons of the 70/20/10 Rule
The 70/20/10 Rule is simple to follow, but it is not perfect for everyone. Here are the main advantages and disadvantages to consider before using it.
Pros
- Higher Savings Rate: Allocates more income to savings and investments than other methods.
- Easy to Follow: The percentages are simple and do not require complex tracking.
- Accelerates Debt Payoff: Dedicating 10% to debt can help you become debt-free faster.
Cons
- Less Room for Spending: The 70% limit for needs and wants may feel tight for some households.
- Not Ideal for Every Budget: High cost-of-living areas can make sticking to the rule harder.
- Rigid for Some Incomes: Irregular or seasonal income may require frequent adjustments.
70/20/10 Rule vs. 50/30/20 Rule
Both budgeting methods keep things simple, but they focus on different goals.
The 50/30/20 Rule works best for people who want a balanced budget with more room for discretionary spending. The 70/20/10 Rule puts a bigger focus on savings and debt repayment, making it better for those who want to reach financial goals faster.
Tips to Make the 70/20/10 Rule Work
Following the 70/20/10 Rule becomes easier when you use tools and habits that keep you consistent.
- Use Budgeting Apps: Budgeting tools like Monarch, Quicken Simplifi, or Empower can track spending automatically so you stay within your targets.
- Start with Smaller Savings Goals: If 20% feels too high at first, begin with 10% and increase it as your budget allows.
- Review Spending Regularly: Check your spending every quarter and adjust as your income or expenses change.
Final Thoughts
The 70/20/10 Rule makes budgeting simple while putting savings and debt repayment front and center. It gives you a clear plan for managing money without tracking every dollar in detail.
You do not have to be perfect from day one. Even small changes toward these percentages can help you save more and pay off debt faster over time. The key is staying consistent and adjusting as your income or expenses change.
Frequently Asked Questions
How do I start if my budget is already tight?
Begin with smaller percentages. Even saving 5% instead of 20% can help you build the habit and increase it later when expenses allow.
Can I use the 70/20/10 Rule if I have irregular income?
Yes, but base your percentages on your average income from the past three to six months. This approach keeps things flexible while staying realistic.
Should I prioritize retirement savings or paying off debt first?
If you have high-interest debt, focus on paying it down while making at least the minimum contributions to retirement accounts to avoid losing employer matches.
Is the 70/20/10 Rule good for families with kids?
It can work well, but you may need to adjust the percentages slightly if childcare or education expenses push your needs above 70%.
How often should I review my spending with this rule?
Check your spending every month at first. Once you are comfortable, a quarterly review is usually enough to stay on track.
