What Is the 70-20-10 Rule for Personal Finance?

Jennifer Wills
Feb 4
3 min read

The 70-20-10 rule is a framework for directing your income to spending, saving, and debt repayment. These guidelines suggest earmarking 70% of your after-tax income for essential and nonessential expenses, including debt payments, 20% for savings and investments, and 10% for additional debt payments or donations.

How to Apply the 70-20-10 Rule

The framework for the 70-20-10 rule is broken down as follows:

Allocating 70% for Expenses

The 70-20-10 rule places your cost of living and discretionary spending into one category. Since there is no distinction between your wants and needs, consider evaluating which percentage of your spending is fixed, such as your mortgage or rent and utilities, and which percentage is available for spending as you choose, such as dining out and seeing movies. Use your findings to decide how to spend 70% of your income.

Saving 20% of Your Income

The 70-20-10 rule allocates 20% of your income for savings and investments, such as an emergency fund, a down payment on a home, and a retirement plan. If you are saving pre-tax income in a 401(k), 403(b), or another retirement program, you might not need to save as much of your take-home income.

Using 10% for Additional Debt Repayment or Donations

The 70-20-10 rule allocates 10% of your after-tax income for paying down long-term debt, such as student loans and medical debt, or donating money. (The minimum payments for other debt, such as credit cards or car loans, are included in your monthly expenses.) You might use this 10% to support your house of worship, favorite nonprofit organizations, or community events.

Benefits of the 70-20-10 Rule

The 70-20-10 rule is best for individuals who are learning to manage their money. Because most schools don’t teach personal finance, most people don’t understand how money works and end up making poor financial decisions. A lack of planning can lead to substantial debt and delayed retirement.

A simple, streamlined approach to personal finance, such as the 70-20-10 rule, can help you get organized and focus on your savings goals. As your needs change and you become

Challenges with the 70-20-10 Rule

The following are tips to overcome challenges with the 70-20-10 rule:

A potentially unrealistic savings rate: Saving 20% of your income can be difficult when you are learning to manage your money. Start saving as much as possible, and increase it when you can. Some savings are better than none.
No separation between essential and nonessential spending: Although having a single spending category simplifies your budget, understanding how much goes to necessary living expenses and fun is important. Seeing what you work hard for and spend your income on encourages you to evaluate where you want your money to go. Perhaps you would rather spend less on going out so you can pay down debt, take a vacation, or save for a home.
No prioritization of debt repayment: A simplified budget doesn’t account for the nuances of debt priorities. For instance, if your debt has high interest rates, limiting your repayments to 10% of your income while saving 20% might not be wise.

Tips for Success with the 70-20-10 Rule

The following tips can increase your success using the 70-20-10 rule:

Track your expenses: Review your monthly spending to ensure you’re not overspending in any category.
Adjust your spending as needed: If you are overspending in a category, determine how you can cut back. Remember that you can customize the framework to fit your needs, such as allocating more money to debt repayment and less to donations.
Automate your savings: Set up part of your paycheck to go to your retirement account and part to your savings account. Automatic deposits help you attain your savings goals.