The 70/20/10 budget: a beginner’s guide

If you’re not sure how to divvy up your income among your necessities, savings goals, and fun money, a percentage-based budgeting strategy can simplify the process. The 70/20/10 budget divides your income into three main categories: 70% for needs, 20% for savings, and 10% for wants. This method helps you manage your finances by clearly defining how to allocate your income, ensuring that you cover essential expenses, save for the future, and still enjoy some discretionary spending.

Here’s what we’ll cover:

• The importance of budgeting
• Breakdown of the 70/20/10 budget
• How to use the 70/20/10 budget
• Benefits of the 70/20/10 budget

Why budgeting matters

At its core, a budget is a plan for how you’ll spend and save your income. Budgeting helps you manage your money on a day-to-day basis, as well as make proactive decisions about how you’ll save and invest for the future. By sticking to a budget, you can ensure that your spending aligns with your priorities and long-term objectives.

There are many budgeting strategies to choose from. Using the 70/20/10 rule puts the bulk of your income toward essentials, which can be helpful if you have a high cost of living. It also prioritizes savings over discretionary spending; this emphasis can be valuable if you’re willing to forego some luxuries in the moment in order to build a brighter financial future. 

Breakdown of the 70/20/10 budget

70% for needs

Needs are the essential expenses that you cannot do without. What counts as a need depends on your particular circumstances; common essentials include:

• Housing: Rent or mortgage payments
• Utilities: Electricity, water, gas, phone 
• Groceries: Food and personal hygiene products 
• Transportation: Car payments, fuel, public transit
• Insurance: Health, auto, renters/homeowners  

20% for savings/investments

Putting aside money for the future is a core component of building financial stability. With the 70/20/10 budget, you’ll put 20% of the money you earn toward your future financial goals, such as:

• Short-term goals: Things you could achieve in about a year, like saving for a vacation or building an emergency fund
• Mid-term goals: Achievements you could reach in one to five years, like buying a car or saving for a down payment on a house
• Long-term goals: Targets that require a long-term commitment like paying off your mortgage or saving enough for retirement 

10% for wants

Wants are non-essential expenses that bring enjoyment and fulfillment to your life. The 70/20/10 budget makes room for this discretionary spending, but limits it to 10% of your income. Wants vary tremendously based on your individual lifestyle. Common types of discretionary expenses include:

• Dining: Restaurants, takeout, delivery meals
• Entertainment: Events, movies, streaming services
• Hobbies: Crafting, sports, gaming, music, gardening
• Shopping: Just-for-fun purchases, luxury items, new gadgets
• Services: spa days, car detailing, house cleaning

How to use the 70/20/10 budget

Calculate your monthly income

Start by calculating your total monthly income, including all sources such as salary, freelance work, and side gigs. Be sure you’re calculating your take-home pay after taxes; if you make money as an independent contractor, remember to set aside a portion of your income for taxes when determining your actual take-home pay. 

Determine your needs vs. wants

Review your expenses over the past year and decide what’s essential and what’s not. It can take some thought to distinguish between needs vs. wants. What feels like a nice-to-have for one person can be a necessity for someone else, so reflect on what’s required for your individual situation. Make a list of all your expenses and categorize them as either needs or wants. 

Create specific budget categories

Within your 70/20/10 budget, you’ll need to establish budget categories for needs and wants. Break down your needs into specific expenses and allocate 70% of your income to covering them. Then examine your wants and decide which budget categories to include, devoting 10% of your income to those.  

Set your savings goals

To maximize the effectiveness of your saving efforts, it’s helpful to create specific financial goals. Write out your short, mid, and long-term goals and determine your time horizon for meeting each one. Based on that, apportion 20% of your income among your saving and investing goals. 

Benefits of the 70/20/10 budget

The 70/20/10 budget is simple to put into practice. Its straightforward structure makes it easy to understand and follow. And by balancing needs, savings, and wants, it helps you prioritize your necessities and financial future without eliminating all discretionary spending. 

Simplifies financial planning

The 70/20/10 budget makes financial planning straightforward by using percentages to allocate your income among three large umbrellas for saving and spending. Within those allocations, you can create specific categories for your expenses and define individual savings goals. It eliminates the guesswork of figuring out how much you should save each month. 

Promotes savings and investments

If you find that it’s hard to save money, the 70/20/10 budget provides structure for prioritizing your financial future. By dedicating 20% of your income to saving and investing, you’ll make progress toward your goals steadily over time. This helps you build a strong financial foundation and invest in opportunities that grow your wealth.

Encourages mindful spending

The 70/20/10 budget allocates just 10% of your income to discretionary spending. To stick with it, you’ll likely need to be mindful about how you spend your money. That may mean finding ways to save money and learning to reduce impulse buying. The benefit is that you can make intentional choices about how you spend money, focusing on what truly brings you joy.

Flexibility and adaptability

While the 70/20/10 budget provides percentages for allocating your income, you don’t have to stick to them rigidly. You can adjust the percentages to better fit your needs while maintaining the overall structure. This flexibility makes it suitable for different income levels and adaptable as your financial situation evolves.

Get started with the 70/20/10 budget

Even if you’ve never built a budget before, the 70/20/10 rule is straightforward to set up. Once you get started, track your spending to ensure you don’t exceed your planned limits for your budget categories. You might also want to automate your savings to help you stick to your plans; set up monthly automatic transfers to your savings and investment accounts so you don’t accidentally spend what you were planning to save. Finally, review your budget every month and make adjustments as needed. Ultimately, the best budgeting strategy is one that works for your circumstances and helps you stick to your financial plans. 

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