Learn About The 70/20/10 Budgeting Rule

Try the 70-20-10 rule to help you with your finance and budget your money better

The 70/20/10 budget rule is simply put, a concept that is applied in the context of financial planning and budgeting. The rule suggests a proportional allocation of income or resources across three categories: 70% for essentials, 20% for savings and investments, and 10% for personal enjoyment

When you know exactly what you have to spend across the month and what you can spend it on, you will be able to better manage your finances and spending habits such as over spending on something you want without thinking about your needs, and also be able to manage your wants and needs in a more disciplined way.

To start with this rule, you need to work out your total income for each month, and then divide up into the percentages, and then just stick to it!. This is one of the ways I personally manage my finances, and it has always helped me from over spending on stuff I don't actually need by not impulse buying too much. I know exactly what I have to spend and on what, and it also allows me to put money away for a rainy day.

Now there are different variations of this rule; for example, in this one, 10% is for personal enjoyment, while in other variations, it is for paying off debt. I think it is important to have some money for your own personal enjoyment; otherwise, what is the point? Now obviously, if you are in debt, it is important to pay it off as quickly as possible, so I would probably use the 20% savings category in this example to go towards some of the debt.

You can adapt it to your circumstances as you wish; the important thing is to understand the money you have and how it is spent, and to prioritise what is important. You can even change the percentages. Another popular variation is the 50/30/20 rule, for example. It is entirely upto you.

70%: Essentials

The largest portion of this rule, 70%, will be allocated to covering your essential expenses. This category includes necessary and recurring costs such as housing, utilities, groceries, transportation, etc. These expenses are essential for maintaining a comfortable and secure lifestyle. By dedicating 70% of your income to these necessities, you will ensure that your basic needs are met and that you can sustain your day-to-day life.

20%: Savings and Investments

The next component of the 70/20/10 rule is to allocate 20% of your income towards savings and investments. This category focuses on helping you build some financial security and prepare for the future. It includes contributions to retirement accounts, emergency funds, and long-term savings. It may also involve investing in things such as stocks that can generate growth and provide returns over time.

By setting aside 20% of your income for savings and investments, you will have a nest egg to fall back on when you need it. Knowing you have some money for an emergency situation if needed takes a big mental burden off your shoulders and can have a positive impact on your wellbeing.

10%: Personal Enjoyment

The remaining 10% is allocated to your personal enjoyment, as everyone needs to enjoy themselves! This category will allow you discretionary spending and the opportunity to treat yourself to things that bring you joy and happiness. It may include dining out, entertainment, hobbies, vacations, and other non-essential purchases. 

This allows for a healthy balance between responsible financial management and enjoying yourself. While it is important to prioritise essentials and savings, this category acknowledges that you need to treat yourself as well!

The 70/20/10 rule will help you provide a framework for balanced financial planning, emphasizing the importance of dividing your income up in terms of importance. By following this rule, you will help establish a more healthy relationship with money.