Jan 24, 2022 4 min read Finance

The 70/20/10 Rule

As the price of goods and services increase each year due to inflation and other variables, it is extremely important to understand how to budget your money. For anyone who has struggled to budget (myself included) I have found that the 70/20/10 rule has been really helpful in making sure that I am following a plan.

What is the 70/20/10 Rule

The 70/20/10 rule is referring to the percentage split of your income and what you should be doing with them. You can think of it as 3 buckets/categories for which your money should be going into. So if you choose to follow this rule, it basically states that you would allocate:

70% of your monthly income to living expenses
20% of your monthly income to saving/debt
10% of your monthly income to investing or what I like to refer it to as the "FUN MONEY"

The reason why I've been following the 70/20/10 rule is because it will help you prioritise your money and allow you to spend your time and energy doing things that are important to you. Note that the 70/20/10 percentages aren't meant to be fixed, everyone is going through different circumstances in life and could require less/more in each category. It is all relative, but as a general rule of thumb, those are the three categories in which you should be splitting your money into and a great way to start is using the split 70/20/10.

What expenses are in the 70% bucket

In this bucket, you would include all of your living expenses. Literally anything that you spend your money on goes into this bucket. So things like:

Rent/mortgage
Car payment
Insurance premiums
Utilities (electricity, water, garbage removal)
Fuel/transportation
Groceries
Child care
Dining out
Clothing
Entertainment
Student loan payments (minimums)
Other debt payments (minimums)
Gifts (unless you keep this exclusively for the 10% Giving category)
Travel
Subscriptions or memberships
Anything on a credit card

The above list is only a few examples, but it includes a lot of common expenses that majority of us have. First calculate all of your expenses and determine if 70% of your income is sufficient. If you're unsure of certain expenditures, I like to always over estimate and round it off to the nearest $10, this will ensure that I would have put away enough money to cover my expenses.

Another way that you can split this bucket up even further is into Fixed vs Variable expenses. Your fixed expenses are the ones that have a set amount to pay every month. These are the “easy” expenses to calculate because they don’t change from month to month. Variable expenses are those that can fluctuate depending on circumstances. For example, you may have to buy more gifts one month due to multiple friends birthdays and also dining out as well.

Once you split it into the two types of expenses, it becomes easier to understand where you can cut down on your spending especially if you are spending more than 70% of your income.

What's in the 20% bucket

Most of us probably find it hard to save money because we don't budget our money or follow a strict plan. Within this 20% you can either do one of two things. You can save the entire 20% of your monthly income OR use it to reduce any debt/loan that you currently have. I generally like to save the entire 20% as it also acts as your emergency funds and recommend that everyone puts aside some money for when shit hits the fan.

Now if you struggle with putting aside that money because it's so accessible, I have a few tips for you to try out. You need to create as much "friction" as possible to access your savings. What I mean by "friction" is increasing the number of steps required to get to what you want. The more steps that are involved, the more likely we are to give up on doing it and leave it behind.

So one way of making sure that we don't touch our savings is opening up another bank account with a different bank. This way it's:

No longer as accessible
No longer visible in our daily transactions
Becomes a digital piggy bank which we don't touch unless absolutely necessary

What to do with the remaining 10% (Fun Money)

I like to refer to this bucket as the "fun money". Budgeting doesn't always have to be boring and strict all the time, it's important to understand that we're all human at the end of the day and we should reward ourselves once in a while. So think of this bucket as the money set aside to pursue what you want in life. Here are some examples with what you can do with it:

Financially: You can invest your money into an ETF, shares, Managed Funds, etc
Personal Development: You can invest this money in buying books, personal hobbies, etc
Relationships: I think it's always nice to be able to give back to others so being able to have money set aside to personally thank someone is a great way to maintain/strengthen relationships without it being a financial burden

It really depends on what you want to do with this money but it's completely up to you. Certain months I would just save this extra 10% but I would personally recommend that you use this money to either invest financially or in yourself. There was a post that I love which puts everything into perspective as to how we spend our money and it goes something like this:

Starting a business: $999 - Costs too much
Buy a new iPhone: $999 - No Problem
Healthy Groceries: $100 - Costs too much
Dinner & drinks: $100 - No Problems
Watch Netflix: 2 hours - 1 more episode
Learn a new skill: 2 hours - No Time

If you found his helpful and it has made budgeting easier for you, I would love to hear from you on: contact page. Also, if you're interested in reading more about financial tips and investing, make sure you subscribe to the blog as I'll be posting weekly content.