You have probably heard of the 50-30-20 budget method. However, a new strategy is emerging, and it may be more realistic in the current economic climate.
The 70-20-10 budget rule divides your after-tax income into three simple categories: 70% for essential living expenses, 20% for savings and 10% for debt repayments or charitable donations. Let's dive into this budget method and see whether it is the right fit for your finances.
Let's start with the 70%. This is the part of your monthly income that goes towards your living expenses. Think of things like rent, utility bills, groceries and other fixed expenses. These are the basics you need to live day-to-day. 70% is a huge portion of your income, but with the current recession, it may be more realistic for those renting their homes. Keeping this category within 70% of your take-home pay helps ensure you have enough money for the essentials without overspending.
Next up is the 20%. This portion is all about savings and investments. Building an emergency fund is crucial. Life is unpredictable, and having a financial cushion can save you from unexpected expenses. You might also consider automatic deposits into your savings account or investment account. This could include your retirement savings, like contributions to your retirement accounts or putting money aside for future expenses.
The final 10% goes to your debt repayment plan. If you have credit card debt or other high interest debts, this is where you need to focus your debt repayment efforts. You might use the debt snowball or avalanche method to pay down balances. For example, you could make at least the minimum payments on all debts, then use any extra payments to tackle the debt with the highest interest rates first.
Some versions of this method allocate 20% to savings and debt repayment and 10% to personal spendings, such as shopping, charity donations and gifts. You can customise this method in many ways as long as the percentage split remains 70-20-10.
This monthly budget strategy works because it is simple and flexible. There is no hard and fast rule that you must follow to the letter. If your financial situation changes, so can this strategy and you can adjust the percentages accordingly. Maybe one month, you will have more discretionary spending because of a special event, and the next, you will focus on paying off more of your debt.
Tracking expenses is crucial in this process. Start by understanding your monthly expenses. Create a detailed budget that includes all of your regular fixed and variable expenses. Fixed expenses, like rent and utility bills, are consistent each month. Variable expenses, such as grocery bills or daily spending on fun things like coffee or entertainment, can change.
Your personal finance journey is unique. The 70-20-10 budget is a guideline to help you balance your money in a way that aligns with your personal values and financial goals. To get started, list all sources of your income. This includes your salary, any side hustle income and even passive income, if you have it.
Next, categorise your spending. This might seem like a complicated process, but it doesn’t have to be. Go through your bank account to track your spending and see where your money goes. Split your after-tax income into the three categories of the 70-20-10 rule and adjust as needed.
This budgeting method helps in several ways. It simplifies financial planning by breaking down your finances into manageable chunks. It ensures you save enough and pay down debt, while covering your living costs. Plus, it gives you the freedom to enjoy fun purchases without guilt.
Using the 70-20-10 budget can also lead to a more detailed budget in the long run. You will get a clearer picture of your financial health as you track your expenses and adjust your spending. This can help you set and achieve your financial goals, whether it is buying a home, opening a new investment account or building up your retirement savings.
The 70-20-10 budget is a powerful tool for managing your finances. It helps you balance spending, saving and paying down debt in an easy-to-understand and implementable way. By following this budgeting rule, you can take control of your money and work towards the financial future that you want. Remember, personal finance is personal, so feel free to adjust the percentages to fit your unique needs and goals.
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