What is the 70/20/10 Budgeting Method?

How do you beat the financial blues? This is a concern for people of all income levels. According to a recent survey by the American Psychological Association, 64% of adults indicated money was a significant source of their stress. To ease your financial stresses, it’s key to have a monthly budget. One type of budgeting is the 70/20/10 method. The 70/20/10 split model can be helpful for a majority of households. 70% of your monthly budget should go to monthly expenses and 20% should go to savings. The last 10% should go to debt. If you’re in a position where you don’t have a debt to pay off, this 10% can also go to donations. 

So, how do you build this budget? Let’s break it down.

How to calculate your monthly income

Use your net monthly income as the baseline for how to budget each month. To calculate your monthly income you first have to figure out your yearly pay. Multiply your hourly wage by the number of hours you work each week. Then, multiply the total by 52. Now that you know your annual gross income, divide it by 12. You’ll be left with your monthly income.

What is the 70%?

Living Expenses. This includes your mortgage/rent, groceries, gas for the car, childcare, etc. Basically, all of your living expenses are necessities. Calculate 70% of your net monthly income and subtract your living expenses. If you have income left for this category, that’s money you can spend on other things. If you don’t, that is completely okay. We will cover expendable income later on in this article. 

What is the 20%?

Savings. This percentage breaks down into three subcategories. The first subcategory is 10% for retirement. If you’re younger, this might seem like a silly task. But, putting aside funds for retirement early on is extremely crucial. It’s estimated that a retiring couple could need up to $295,000 for health care alone, so it’s important to plan ahead and start saving as soon as possible.

Next, set aside 5% for emergencies. Emergencies can include anything from car trouble to periods of unemployment. It’s there for any large, unforeseen expenses that may come your way. As we’ve seen with the COVID-19 pandemic, we need to be prepared for anything. It’s tempting to dip into this fund, but leaving it alone for as long as possible is crucial.

The remaining 5% is for your specific goals. This is where you’ll put a little extra away for things like vacations, a new car, college tuition, etc. Similar to your emergency fund, this 5% is all about planning ahead. 

What is the 10%?

Debt. Part of the reason this model can be so helpful is this last category. Anyone can acquire debt. It can pile up from car loans, student loans, medical costs, credit cards, etc. The last 10% of your budget will go to paying down any long-term debt.

If your goal is to have more financial stability, it’s good to have a perspective on your debt. Hopefully, with some more discipline, you’ll slowly get out of debt. 

If you’re in a place where you don’t have any debt, consider donating to a cause that is important to you!


If you’re able to cover each category with funds left over, you’re on a great path. Keep saving and planning ahead!

If it doesn’t add up, do not fret! Now that you have your expenses organized, look at where you’ve gone over budget. For example, if your debt is at 15%, you may need to temporarily reduce one of the other categories. You may have to reduce your savings for specific goals. In the meantime, you can set a personal goal to get that number down to 10%. If it’s difficult to adhere to the 70/20/10 ratio, then you can make adjustments if needed.

Saving for future expenses is just as important to pay off debt. If you’re over budget on your living expenses, consider adding another source of income or cutting back. You can pick up a side hustle, eat out less, or limit how many online streaming services you use.

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Budgeting Basics Quiz

Ready to test your knowledge on the basics of budgeting? You’ll have ten multiple-choice questions to answer. See how much you know!

1 / 10

1. What is budgeting?

2 / 10

2. Which of the following is an example of a ‘fixed expense’?

3 / 10

3. What is discretionary income?

4 / 10

4. The best way to start the budgeting process is to

5 / 10

5. In regards to personal finances, “zero-based budgeting” is:

6 / 10

6. With an ‘envelope’ budgeting system, you:

7 / 10

7. Which of the following are the best tools for budgeting?

8 / 10

8. With a “rainy day” savings fund, you:

9 / 10

9. When putting together a budget, which of the following items should you include?

10 / 10

10. What is the most likely reason for a budget to fail?

Your score is

The average score is 80%


It’s important to remember that there is no one-size-fits-all for structuring a budget. The 70/20/10 method might not be for you. Your needs and goals will change as you get older. No matter which model you choose, the most important factors are having clear goals and discipline. If you’re able to stick to your budget, you’ll be able to lessen your financial stresses.

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