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What is the 70/20/10 budget?


What is the 70/20/10 budget
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The 70/20/10 budget is a budgeting strategy that’s gained popularity in recent years. It allocates your after-tax income into three main categories: 70% for living expenses, 20% for savings, and 10% for debt repayment or donations

In this article, we explore the benefits of the 70/20/10 budget and outline strategies to implement it effectively. Whether you’re new to budgeting or looking for a fresh approach, the 70/20/10 budget could be the solution you’ve been searching for.

If you’re ready to learn how to implement this popular budget outline to meet your saving and spending goals, read on!

How Does The 70/20/10 Budget Work?

As mentioned earlier, the 70/20/10 budget suggests that you allocate 70% of your income to living expenses, this includes needs and wants. The 20% should go towards savings or investments, and the 10% should go towards debt repayments or donations. While there is some disagreement over the use of the last 10%, it is generally considered your “giving” category, or else an additional 10% to use however you please. 

Below is an overview of things typically included in each category:

70% For living Expenses

Living expense in this case refers to the following:

  • Utilities
  • Rent
  • Transportation
  • Healthcare
  • Mortgage payments
  • Groceries
  • Discretionary spending, or “Wants”. 

These are the costs that you incur to maintain your current lifestyle. 

20% for Savings

The 20% allocated for savings is meant to provide a financial cushion for the future. This category can include the following:

This portion of your income can be directed towards building an emergency fund, saving for retirement, or achieving other long-term financial goals.

10% for debt repayment or donations

The remaining 10% is allocated for debt repayment or donations. Here are some things you might include in this portion of the budget:

If you’re debt free and have nothing to donate to, you can use this last 10% as extra savings money, or to treat yourself now and then. It’s entirely up to you

The Pros And Cons Of The 70/20/10 Budgeting Method

The 70/20/10 method comes with several pros and cons. These are summarized below,.

The Pros Of The 70/20/10 Budget

  • Simplicity: With only three categories, the 70/20/10 budget is easy to manage and understand. 
  • Peace of mind: By allocating a significant portion of your income towards living expenses, you can ensure that your essential needs are met. This helps create a sense of stability and reduces financial stress.
  • Saving and investment focus: The 20% allocated for savings allows you to build a financial safety net and work towards achieving your long-term financial goals. If you include investments in this part of the budget, you can rest easy knowing you’re not neglecting your long-term savings. 
  • Flexibility: While the 70/20/10 budget provides a general guideline, it can be adapted to suit your individual circumstances. 
  • Financial discipline: Following a budget requires discipline and accountability. The 70/20/10 budgeting method encourages mindful spending and helps you develop healthy financial habits.

By utilizing the 70/20/10 budgeting method, you can take control of your finances, achieve financial stability, and work towards your long-term financial goals.

The Cons of the 70/20/10 budget

This budget format doesn’t work for everyone. You may enounter specific issues with it, including the following: 

  • No separation between needs and wants: The 70/20/10 budget doesn’t allocate different categories for your needs and wants. While it can simplify your budgeting process, mixing up the needs and wants can lead to you overspending or missing out on saving opportunities. 
  • Insufficient debt repayment: Leaving only 10% of your budget to repay debts might lead to more financial instability. For example, if your credit card bill is more than 10% of your monthly income you might carry a balance and end up paying interest and lowering your credit score because you didn’t dedicate enought funds to paying off your debt each month. 
  • Lack of detail: These three categories might lack nuance and make it harder for you to understand where your money is really going each month. The simplicity of the 70/20/10 budget is also its downfall in this regard. 

Overall, this budget is straightforward, but can be hard to impliment and use effectively. If this method doesn’t work for you, there is no shame in seeking out a different budget format that works for you and your goals.

How To Stick To The 70/20/10 Budget

To make the most of the 70/20/10 budgeting method, consider the following tips:

  • Automate your savings: Set up automatic monthly transfers to your savings account, this will eliminate the temptation to spend your extra saving funds each month. 
  • Prioritize your high-interest debts: If you’re paying off your debts and feel like 10% each month is insufficient for all of them, focus on the ones with the highest interest rates. If you want alternatives to this method consider some of our other strategies to pay off your debts. 
  • Review your budget regularly: Regularly assess your budget to ensure that it aligns with your current financial situation and goals. Make adjustments as necessary to accommodate changes in income or expenses.
  • Seek professional advice: If you’re unsure how to allocate your income or have complex financial circumstances, consider consulting a financial advisor. They can provide personalized guidance to help you optimize your budget.

If you follow these tips you’ll be making strides towards your saving goals in no time. But remember to remain realistic and to adjust your budget to suit your goals if it isn’t working for you.

Budgeting Tools To Help You Stick To The 70/20/10 Format

If you’re not sure where to begin with your budgeting journey, there are several free and accessible tools available to make this process easier. For example: 

  • Budgeting apps: There are numerous mobile apps available that can help you track your spending, set budgeting goals, and automate savings. Examples include Mint, YNAB (You Need a Budget), and PocketGuard.
  • Spreadsheet templates: If you prefer a more hands-on approach, you can use spreadsheet templates to create and manage your 70/20/10 budget. Microsoft Excel and Google Sheets offer pre-designed templates that you can customize to suit your needs.
  • Online finance guides: There are multiple free resources available to guide you through your budget setup process, including youtube videos, blogs, and websites. Do some digging and see if any of these resources can help you overcome the initial budget hurdle. 

Remember, you don’t have to do it on your own! You’re allowed to ask for help and use any tools you want to make it easier to stick to your budget and allocate your funds.

Which Companies Use The 70/20/10 Budget?

The 70/20/10 budgeting method is not only applicable to individuals but can also be implemented by companies. Here are a few case studies of companies that have successfully utilized the 70/20/10 budget:

  • Google: Google famously implemented the 70/20/10 budgeting method for its innovation strategy. They allocated 70% of their resources towards core business operations, 20% towards emerging projects, and 10% towards speculative ventures (anything new or unrelated to core work). This approach allowed Google to maintain its core business while investing in future growth and innovation.
  • Procter & Gamble: Procter & Gamble, a multinational consumer goods company, adopted the 70/20/10 budgeting method to streamline its marketing spending. They allocated 70% of their marketing budget towards established brands, 20% towards emerging brands, and 10% towards experimental initiatives. This strategy helped P&G optimize its marketing efforts and allocate resources effectively.
  • General Electric: General Electric (GE) used the 70/20/10 budgeting method to manage its research and development (R&D) expenditures. They allocated 70% towards incremental innovation, 20% towards adjacent business opportunities, and 10% towards breakthrough initiatives. This approach allowed GE to balance short-term profitability with long-term growth and innovation.

These case studies demonstrate how this budgeting strategy can be applied to more than just personal finances. The 70/20/10 budget can be used to set clear personal and organizational priorities, while not neglecting often side-lined savings and debt repayment requirements and needs.

Final Thoughts

The 70/20/10 budget offers a simple and effective way to allocate your resources towards needs, savings, and debts. Its widespread use by large, successful organizations demonstrates its usefulness and shows that it can work for individual and business purposes. 

While it can be tough to allocate so little to your monthly debt repayments, or an entire 20% to your savings, this method works well if your goal is to make consistent strides towards your financial goals. So what are you waiting for? Happy budgeting!

Author Bio

Mohamed Konate

Mohamed Konate is a personal finance expert, blogger, and marketing consultant based out of Toronto. He is a former financial services professional who worked for many years at major Canadian financial institutions where he managed the marketing strategy around various financial products ranging from credit cards to lines of credit. Mohamed is passionate about personal finance and holds a Bachelor in Business Administration from the University of Quebec (Montreal) and a Master in International Business from the University of Sherbrooke (Quebec).He is also the author of the Canadian Credit Card Guidebook. Read his full author bio