While most people agree that budget planning is important to attaining financial stability, sticking to it is an entirely different story. As many people will tell you, following a budget is no walk in the park. 

There are many strategies out there to help you build and stick to your monthly budget. Some people use the “envelope system” and put cash in envelopes for each spending category. Others focus on paying off debts by using either the avalanche or snowball method.

Another popular way to organise a budget are “money rules”. Most people are familiar with the 50/30/20 rule. But have you heard of the 70-20-10 rule? 

According to this rule, 70 per cent of your monthly income should go to your living expenses, 20 per cent should go to savings and the remaining 10 per cent should be put towards paying debt. 

But how do you start applying this rule to your finances? Let’s break it down.

What is the 70-20-10 rule? 

The 70-20-10 rule is one way to budget by percentages. 

The 70-20-10 budget rule divides your monthly income in your budget into three categories: expenses, savings and debt payoff.

This budgeting system makes it easy to create budget categories that you add money to each month. It can work with any level of income and it’s flexible enough that you can adapt it to fit just about any pay schedule. 

How does the 70-20-10 rule work?

First, you need to calculate your monthly income. Your net monthly income is your take-home pay, after taxes. You’ll use your net monthly income as the baseline for how to budget each month.

Then, divide your income into the following categories and respective percentages: 

Use 70 per cent for living expenses 

Calculate 70 per cent of your net monthly income and subtract your living expenses. Living expenses include your rent, groceries, transportation, childcare etc. Essentially, your living expenses are necessary costs that get you through the month. 

But it can also include spending on clothes, entertainment, hobbies – anything else that might be considered a want versus a need. 

It’s really important to include every single expense you have at this step. Otherwise, your budget percentages might not work when it’s time to apply the 70-20-10 rule. 

By lumping everything that it takes to “live” into one category, it will be easier to create a simple structure for yourself to build your savings around. 

Allocate 20 per cent for savings 

Next up, the 20 per cent of what you make will go to savings each month. This percentage is further broken down into three subcategories. 

The first subcategory is for retirement, which is 10 per cent. If you’re in the lower age bracket, saving up for your retirement may not seem like a priority. However, putting aside funds for retirement early on is crucial. 

The ASFA estimates that the lump sum needed at retirement to support a comfortable lifestyle is $640,000 for a couple and $545,000 for a single person. This means that the sooner you begin saving money for retirement, the better. When you start early, you can afford to put away less money per month since compound interest is on your side.

The next 5 per cent is earmarked for your emergency fund. Your emergency fund will serve as a financial buffer for any large and unforeseen expenses that may come your way. Emergencies can include anything from car trouble and medical emergencies to periods of unemployment.  

Your emergency fund is there for any large, unforeseen expenses that may come your way. Having money set aside for a rainy day will also help you prevent adding debt through things like using credit cards or falling behind on rent or other payments.

The last 5 per cent is designated to your specific financial goals. This is where you’ll put a little extra away in your savings account for things like travelling, deposit for a new home etc. Like your emergency fund, this 5 per cent is all about planning for the future. Impulse buys can result in debt, which can take a lot of time and effort to get out of.  

Set aside 10 per cent for debt 

We understand that debt happens, and sometimes it can really start to pile up. The remaining 10 per cent of your budget will go to paying down long-term debt you’ve accrued from personal loans, student loans, medical costs, credit cards etc.

Having perspective on your debts can help you increase your overall financial stability, rather than falling into a pattern of incurring debt. If you’re in debt, focus on getting your monthly payments down to 10 per cent  of your income. After doing so, you can choose to boost your emergency funds or savings. With some planning and discipline, you can and will make it even lower.

While this category lumps all debt together, we know that not all debt was made equal. It’s advised to prioritise high-interest debt and pay that off first. This is also known as the debt avalanche method. 

Clear the most damaging debt first and then focus on paying off the rest as quickly as possible to prevent yourself from getting caught up in a damaging cycle of paying off only the interest, without making a debt on the debt amount itself. 

Conclusion 

So you’ve done all the basic steps. You’ve calculated your income and divided it up. If you’re able to cover each category with funds to spare, congratulations! You are well on your way to following through with a solid budget plan. 

But what if it doesn’t add up? Don’t worry! After organising your expenses, it will be easier for you to make the necessary adjustments to your budget. 

For example, if your debt is at 15 per cent of your income, you can choose to reduce your budget for one of the other categories. You can cut back on your living expenses or your savings just until you can pay off your debt.  

Clearly, as with all budgeting rules, the 70-20-10 rule is open to alterations. The most important thing to do is to find a system that works for you, and lets you build the financial future you want.