Budgeting: The 70/20/10 budget rule: how it works and when it beats 50/30/20

What is the 70/20/10 budget rule?

A three-way split of your take-home pay: 70% for everything you live on, 20% for savings, and 10% for paying off debt faster or, once you're debt-free, for giving.

Here's what it looks like on a few incomes, in round numbers, the same in any currency:

The 70% covers needs and wants together: rent, bills, groceries, transport, insurance, eating out, clothes, entertainment and personal spending. Minimum debt payments usually go here too, with the 10% for anything above the minimum.

How is 70/20/10 different from 50/30/20?

The 50/30/20 rule splits living costs into needs (50%) and wants (30%), with 20% for savings and extra debt payments. 70/20/10 merges needs and wants into one 70% and gives debt its own 10%.

On 3,000 a month:

Both save 20%. The difference is in the details: 50/30/20 caps wants, while 70/20/10 lets you decide the balance between needs and wants yourself, and it sets aside a separate 10% so debt payoff doesn't compete with savings.

When does the 70/20/10 rule work better?

When your fixed costs are high. In many cities, rent and bills alone take more than half of take-home pay, so the 50% needs line in 50/30/20 is out of reach from day one. 70/20/10 doesn't ask you to fit needs into half your pay; it just asks that everything you live on fits in 70%.

It also suits people who'd rather not debate whether a gym membership or a phone upgrade is a need or a want. Everything lives in one pot with one limit.

And it suits anyone paying off debt, because the 10% is a dedicated line. Debt payoff doesn't have to fight savings for the same 20%.

Which costs go in which part?

A quick guide for the usual grey areas:

• Minimum debt payments: the 70%. They're a cost of living until the debt is gone.
• Payments above the minimum: the 10%.
• Pension or retirement contributions taken from your pay: they count towards the 20%, even though you never see them in your account.
• Emergency fund and sinking funds: the 20%.
• Yearly bills paid monthly into a pot: the 70%, because they're living costs spread out.

What's the catch?

The 70% can hide a problem. If needs take most of it, there's little left for anything else, and the rule won't flag it.

Continuing the example, on 3,000 take-home: rent 1,100, utilities 180, groceries 400, transport 150 and insurance 120 come to 1,950. That leaves 150 of the 2,100 for everything else: eating out, clothes, gifts, entertainment. It fits the rule, but it's a tight month. If that's your situation, the real question is whether the fixed costs can come down, not which rule to use. How to make a budget goes through setting each line from your real spending.

What if 20% savings doesn't fit?

Start with 80/10/10: 80% for living costs, 10% for savings, 10% for debt. Then move a point from living costs to savings with each pay rise until you reach 70/20/10.

A split you keep is worth more than a better one you abandon. The budget calculator shows what different splits look like on your own pay.

What do you do with the 10% when you're debt-free?

Give it a new job. Common choices are giving to causes you care about, adding it to savings for a 30% savings rate, or a specific goal like a deposit, a car or a holiday fund. If you'd like every unit of pay to have a named job, zero-based budgeting takes the same idea further.

How do you set up a 70/20/10 budget?

Move the 20% and 10% out on payday, then set the 70% as your monthly spending budget.

1. On payday, transfer 20% to savings and send the 10% to your highest-interest debt.
2. Set your monthly budget to the remaining 70%.
3. Split the 70% into categories if you'd like more control, or keep it as one number.
4. Check mid-month whether spending is on track.

In Wealtie, set your monthly budget to the 70% figure and split it by category if you want, and Budget Health warns you mid-month if your spending pace will take you past it. The savings transfer counts as a transfer between your own accounts, not as spending, so the budget shows only what you spent.