You may be familiar with the 70/20/10 model for leadership and personal development. But today, we’re going to teach you how the 70/20/10 budget might prove just as successful for you and your financial development.
The 70/20/20 budget breaks down your monthly after-tax income as follows:
- 70% Expenses
- 20% Savings
- 10% Donations
This percentage-based budget can be helpful if you currently have a low income and most of your take-home pay goes to expenses. It also can be an ideal budget for minimalists who don’t spend frequently on material purchases.
Whether you’re just beginning your personal finance journey or want to find a way to cut the clutter out of your finances, read on to learn how the 70/20/10 budget could work for you.
How does the 70/20/10 Budget Work?
If you’re new to budgeting and don’t feel like you either have or care enough about your personal finances to try it, we encourage you to please think again.
Percentage-based budgets allow you to grow your finance strategy as you grow. That means that your budget stays the same whether you make $1,000, $3,000, or $5,000 a month. This is because the percentage you allocate to each category is constant (70%, 20%, and 10%). As your income grows, you can even adjust the percentages to increase your savings or other categories (remember to be careful not to inflate your lifestyle).
To see how the 70/20/10 budget works, let’s use an example. Say your monthly after-tax income is $3,000.
Calculate 70% of your monthly after-tax income:
$3,000 x .70 (1 = 100%, so .7 is 70%) = $2,100.
Next, calculate 20% of your monthly after-tax income:
$3,000 x .2 (1 = 100%, so .2 is 20%) = $600
Last, calculate the final 10%:
$3,000 x .1 (1 = 100%, so .1 is 10%) = $300
Your 70/20/10 budget breakdown would look like this:
70% Expenses: $2,100
20% Savings: $600
10% Donations: $300
If your monthly after-tax income is different, simply repeat the same calculations above with your numbers.
| Monthly After-Tax Income | 70% Expenses | 20% Savings | 10% Donations |
| $1,000 | $700 | $200 | $100 |
| $2,000 | $1,400 | $400 | $200 |
| $2,500 | $1,750 | $500 | $250 |
| $3,000 | $2,100 | $600 | $300 |
| $5,000 | $3,500 | $1,000 | $500 |
| $6,000 | $4,200 | $1,200 | $600 |
| $7,500 | $5,250 | $1,500 | $750 |
| $10,000 | $7,000 | $2,000 | $1,000 |
70% Expenses
This portion of your budget is everything you need to live off of. That includes housing, food, transportation, utilities, etc. It may include some leisure expenses like dining out and entertainment as well.
But remember, not every expense is created equal.
Significant portions of your expenses are likely to be spent on food and housing. If those two expenses alone are close to 70% of your income, don’t fret! It’s helpful to recognize where the majority of your money is going so you can find ways to lower your expenses.
Take the largest category and try to find ways to bring it down: Consider finding a roommate or downsizing your space to cut down on housing. Try meal prepping instead of eating fast food to cut down on food costs. Or, consider moving closer to work to cut down on transportation costs.
The point being that eliminating fringe expenses that total 5-10% of your overall monthly expenses won’t help you quickly wrangle in your spending. Finding ways to save on your biggest expenses will help you get your finances in order faster than anything else.
20% Savings
Building savings into your budget is a simple, forward-thinking approach to setting yourself up for future success. It’s also the next step in your budget. If you’re struggling to find room for anything besides your expenses, work to increase your income and find a little breathing room. Once you have it though, what do you do with it?
First, set aside money for an emergency fund – at least $1,000. Nearly 40% of Americans can’t come up with $400 in a crisis. If you were to save your $600 every month (20% from our initial example) you would be ready with your emergency fund in two month’s time!
Second, make sure to pay off any debt you have (for things that aren’t your home). Don’t make yourself a victim to debt. Use this portion of your budget to climb out of any holes you may have fallen into.
Third, save up 3-6 months worth of living expenses to mitigate a potential future crisis. Once you have these savings, don’t touch them – except for emergencies (losing your job, medical expenses, etc.)
After you’ve met these financial goals, congratulate yourself! These are big accomplishments, and we’re proud of you. From here, you can start navigating the climb to your financial future.
Now you can begin investing that 20% of your monthly after-tax salary each month. At $600 a month (20% carried down from our initial example), you’d be saving $7,200 each year. If you invested the same amount each year for 5 years, in something with a 7% estimated annual rate of return, you’d have contributed $36,100 with an additional $5,501 in interest for a total of $41,601! In 15 years, you’d have $181,314. And in 36 years, you’d have $1,073,768!
Every step you take on your climb to financial independence is significant. Continue saving every month to help you get there.
10% Donations
This may seem puzzling to some, but the last 10% of your budget is to give away. Why? Think of it like this: when you have enough monthly income for your expenses, you’re living within your means. When you save and invest, you create security and stability. But when you take time to donate and give a portion of your wealth, you create happiness. Not only for others, but for you as well.
Some may take this 10% and pool it towards debt or investments. However, we encourage you to pay off debts sooner so you can be free. This is why we mention it in the 20% portion of your budget. Also, 10% towards investing simply may not be enough to secure your financial future either. Which is why we suggest investing 20% and increasing that amount as time goes on as you have more to invest.
Do people really do this? Yup. We personally donate at least 10% of our income to our Church. And we couldn’t be happier to do so. We believe that giving is an important part of being human. It’s good for the heart, soul, and mind. You can even consider it a form of service. Donate to your congregation or a cause you support. Just try it and see how you feel about the blessings that come to you as a result. Freely we all receive some form of kindness at certain points in our lives. Freely give.
Another way to give is to fund your (future) family. Think of children’s college funds or inheritances. If you don’t take time to give of your substance for them now, it’ll be a lot harder when the time comes that they need your help. Additionally, if you safely invest money for them today, you can leverage the power of compound interest to allow this 10% to mature at the right time. The $300 (10% from our initial example at the beginning of the article) you invest each month could be $123,477 by the time your child turns 18!
Conclusion
As always, stay disciplined and stay on track. It’s a marathon, not a sprint! This is a marathon climb up your financial mountain – fit with checkpoints, setbacks, and steep inclines at certain points. You may not be perfect right off the bat, and that’s okay. Try utilizing other budgeting strategies until you find one that sticks. Soon enough, you’ll be on your way to mastering your finances.
The most important part is to begin.
Climb on, FinBase.
J
