If you want to take control of your spending, saving and borrowing with an organized cash flow plan, you’re in good company. A 2023 Morning Consult poll found that 89% of U.S. adults who have financial goals want to create and maintain a budget.
Because developing an effective money management plan can be confusing, consider adopting the 70/20/10 budget rule. Keep reading to find out what it is and how it can put you on the right track financially.
What Is the 70/20/10 Budget Rule?
The 70/20/10 budget rule is a money management strategy you can use to dictate where you want your income to go. It involves separating your take-home pay into three buckets and dividing each into the following percentages:
— Seventy percent for monthly bills and daily spending. This includes expenses like mortgage or rent, utilities, transportation, insurance premiums, food, clothing and entertainment. If you owe money on credit cards, personal loans or student loans, include those minimum payments here, too. Periodic expenses like travel, haircuts and gifts are also in this category, so estimate their monthly costs and add them in. If you contribute to an IRA or other self-funded retirement plan, add in those amounts. This bucket wouldn’t include money going into employer-sponsored retirement savings plans because your employer already deducts those from your paycheck.
— Twenty percent for saving and investing. Put this percentage of your income away for an emergency account, college tuition, investments or to save for future big purchases.
— Ten percent for additional debt payments or donations. Getting out of debt as fast as possible will reduce finance fees, so if you’re carrying balances try to add as much as you can to those minimum required payments. If you don’t carry debt, you may want to use this money to support causes that are important to you.
[READ: Easy Ways to Pay Off Debt.]
A 70/20/10 Budget Example
Let’s say you take home $3,000 per month. This is how you would allocate your money if you used the 70/20/10 budget:
— Designate $2,100 for monthly bills and spending.
— Deposit $600 into a savings or investment account.
— Earmark $300 for debt payoff or donations.
According to Lawrence Sprung, certified financial planner, founder of Mitlin Financial and author of the upcoming book “Financial Planning Made Personal,” this budget can help guide you in prioritizing your financial goals. You’ll be able to refine your spending, accelerate deleting your debt and ensure you’re saving enough for unexpected costs.
[READ:Read: How to Create a Financial Plan Like a Pro]
How to Prepare a 70/20/10 Budget
There is some prep work that you need to do before creating a 70/20/10 budget rule plan, according to Cary Carbonaro, CFP and senior vice president, director of women and wealth for Advisors Capital Management.
Your first step is to determine exactly how much of your money has been coming in and going out.
Review your past few months’ worth of bank and credit card account statements, then make a list of all the things you’ve spent on during the month — periodically and occasionally.
“Categorize your monthly expenses into which ones are fixed and which are variable,” Carbonaro says. “Budgeting isn’t about not spending but about spending less than you make. If you identify those variable expenses, you can look for opportunities to lower them.”
Go through each expense and ask yourself if you can reasonably cut it down — or out. Maybe you’ve been spending $30 a month on streaming services you don’t use. Cancel your subscription and add that money back into your budget. Or, perhaps you were surprised to see how much all those restaurant meals have been costing. You may not want to eliminate dining out but you can reasonably reduce that expenditure.
Decide on a fixed amount that you’ll use every month to pay off your debt. Because credit cards typically have high APRs, stretching yourself to increase that payment well past the minimum will help you save on finance fees and accelerate your debt payoff.
Automate and Monitor
Once you’re clear on how much of your income should go into each bucket, streamline the process.
Set up automatic deposits for the 20% you’ll be using for savings and investing so the money goes directly to those accounts from your checking account. Do the same for the 10% that will go toward extra debt and/or donations. This will leave you with the 70% in your checking account that you’ll use for monthly bills and spending.
If you want to use your credit card for some of those expenses, use a card with a zero balance. You should have enough to repay the bill in full by the due date because you already allotted those expenses as part of your budget. Bonus: You’ll likely earn credit card rewards you can use to make fun purchases or get cash back.
To maintain this budget you must monitor your spending. Get into the habit of reviewing how much is in your checking account on a daily or weekly basis, then tweak your spending as needed.
“The positive outcome is you know where all your money is going, which is the first step toward financial freedom,” Carbonaro says. “Saving and investing 20% of your pay will put you well on your way toward building wealth and having the retirement you want.”
[READ: Steps to a Higher Net Worth.]
When and How to Bend the Rules
For many, the 70/20/10 budget is a sensible plan because it guarantees money will be available for spending and reaching goals. You can modify the plan, however, to reflect your personal circumstances.
“For example, someone living in the heart of New York City may need to increase the 70% portion of the rule due to higher rent or housing expenses,” Sprung says. “Someone living in an area with lower living expenses may be able to reduce that percentage.”
Another reason to adjust these numbers is if your financial obligations have particularly high interest rates. “In this case, it may make sense to increase the allocation to your debt and reduce what you are saving and investing,” Sprung says. “These are guidelines, not hard and fast rules.”
If the 70/20/10 buckets don’t work for you, change the percentages so they do. The concept, though, remains the same. Alternatives might include:
— 50/30/20. Fifty percent of your income goes to necessities such as housing, food and utilities. Thirty percent is for discretionary spending like entertainment and travel. Twenty percent goes toward savings and debt repayment.
— 80/20. Save 20% of your income and spend the remaining 80% on everything else.
— 60/40. Allocate 60% of your income for fixed expenses like your rent or mortgage and 40% for variable expenses like groceries, entertainment and travel.
— 30/30/40. Thirty percent of your income goes toward housing expenses, 30% toward other living costs like food and transportation, and 40% toward discretionary spending and savings.
Try the 70/20/10 budget rule for a few months and make any necessary adjustments. You’ll probably find there are many ways to get favorable results from this type of organized plan.
“The best rule is to use a plan that’s based upon these guidelines but amended to what will ultimately be followed and will work for you,” Sprung says. “Make it personal.”
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How the 70/20/10 Budget Rule Works originally appeared on usnews.com
