The 70/20/10 rule breaks down your budget into 3 simple categories: 70% for all your spending needs, 20% for savings, 10% for debt repayment,additional investments .
When you are creating your budget please ensure to use your monthly after-tax income. In other words your Net Income.
70% – of your income: Spending. All and everything that you spend on a monthly basis.
These spending items may include:
- Housing
- Food
- Transportation
- Utilities
- Insurance
- Minimum debt/loan payments
- Child Care expenses
- Monthly subscriptions
- Travel
- Entertainment
- Meals Out
- Shopping
20% – of your income: Savings. The 20% should be broken down to 10% family savings and 10% Short and long-term savings. You can also break it down further. For example 10% Long-term, 5% – Emergency Fund, 5% family savings. Some items that can be utilized in this area are:
- Retirement
- Saving for a family vacation
- Emergency Fund
- New furniture
- Unexpected expenses(Christmas gifts, birthdays)
10% – of your income: Debt/Investment/Education. The final 10% is for additional debt payments, further investments specifically in the market, more risky investments.(based on your risk tolerance). Additional future education savings for your kids. If you are currently in debt, I would recommend using this full 10% for that purpose.