70:20:10 Budget: What it is, Limitations & How to Use It

If you have heard of the 70:20:10 budget rule, you have probably come across the starting point of the budgeting plan. Like most people, budgeting is uncomfortable to me, but I have found it can be very freeing once I have worked on it.  When I started off as a financial advisor, budgeting was the first thing I would do with clients. The reality is that most people, even the well-off, never fully had a full grasp of their spending.  However, the ones that had substantial savings generally had some kind of a budget.

The goal of this article is to help you understand in plain English what a budget is, what 70-20-10 is, how to use it and the limitations. By the end you will feel good about setting your own financial course.

What is a budget?

A budget is a financial plan, or financial map, if you please, that can show you the way from Amarillo to Washington DC. Instead of driving blind, and trusting fate and luck to serve up restrooms and food when you need them, with a map in hand, you know what to expect and what lies ahead.

If you have a specific objective, say reaching DC by 12 noon on Sunday, it will help you work backward so that you stand a good chance of achieving the objective. You will, for example, know that only if you start out by a certain time on Saturday, with certain stops built-in, will you be able to reach by the desired time. Further, if you face unexpected events on the way, like a flat tire that loses you some time, you know what to adjust during the remaining path to still make it in time.

What is the 70 20 10 budget rule?

The 70 20 10 budget numbers are the percent numbers to define the allocation of your after-tax earnings into 3 different spending buckets: Spending, Saving, and Sharing. An example of this is for every $100 you earn after-tax, you spend $70, save $20 for the rainy days and donate $10.

As you can see, not much one can do with money, except spend, save or share, is there? Whatever be the set of numbers you use, the total of the three cannot exceed 100, which is what you are earning. A budget is intended to help you plan how you will happily live within your means.

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How to make a 70 20 10 Budget?

Hopefully having established the need for a budget with the introduction of the 70 20 10 principle, the next step is to take it to the logical next step, of breaking down the expenses.

This can be done as an allocation two different and easy ways.

The first way is to take 3 sheets of paper, your bank and credit card statements. Write “Spending, ” Saving, ” and “Sharing” on the top of each paper. Next, put down all the spending you have under each category and then calculate. For every $70 you are spending, you will spend $8 on medical insurance, $12 on car-related expenses, $17 on a mortgage payment, $ 10 on utilities, $9 on groceries, $7 on entertainment, $4 on clothes, and $3 on other miscellaneous items. These should not be random numbers but based on your actual expenses.

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The second way, and the way I recommend, is to use software like Mint (which is free) to import and categorize expenses. The reason why I like this is that you don’t miss any expenses and it automatically updates.

This template could be the starting point of enabling you to understand where your money is going. Only when you know can you do something about it. Does $12 on car expenses sound too much? Can you do with less? What are the trade-offs? These are the questions you will begin to ask yourself once you start the budgeting process.

What is spending?

Spending is simple. All of us know how to do it. Purchasing chocolate from the convenience store is spending. As is taking out a mortgage on your home.

Since spending is easy, if we are running without a budget or plan, it is much more likely that you spend more than your income, instead of the other way round. Financial advisors come across many such situations in their daily practice. I would say most people have more than 70% of their income being consumed by bill payments and regular expenses. I am not saying it right, but if you are spending more, then you have to look at ways to cut expenses.

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What do if you are spending too much?

Like I said earlier, most people in America are spending too much. Popular radio and TV show hosts often beat up their audiences on spending too much. It makes great theatre but isn’t productive. I have made huge financial mistakes and most everyone has. My generation has cell phones, student loans and app subscriptions that past generations didn’t have which make it very tough to

If you are spending too much, then you need to figure out how to spend less. Unfortunately, it is not that simple and may take some time. For me, I dropped my cable TV which saves me $100 a month, and got rid of car payments. Depending on your situation, there are some things that you need to have such as a reliable car or truck for work. Here are a few things that add up you may consider:

Cable TV: It costs generally $75-160 per month in my area, so my family goes without to save money.

Eating Out: This is my biggest vice and I have spent over $1000 a month eating out. Steak restaurants are my weakness. I didn’t eliminate it completely but do put a limit on my monthly eating out. For me, I set a limit of total spend and we divide it among eat outs.

Barber: Due to covid-19, I have had my wife cut my hair at home for over a year now. It used to cost me $25 a month, but after paying for the hair cutter for $40, it is pure savings.

Buying at Bulk at Sam’s and Costco: I am saving 40% or more on my grocery bill by buying in bulk versus the local grocery store. For my family, our grocery budget is the second largest item next to the mortgage, so it is a huge saving.

Growing Food: I have started a garden and think I should be able to save $100 a month off the grocery bill. For many, this is not an option because they don’t have the space, time or skill.

Miscellaneous Spending: My wife and I work on keeping our miscellaneous down and talk about any big purchase before we make it. This avoids us both spending money on stuff and not knowing about it. If you are married, make sure you communicate your spending to your spouse. If I spend $100 a week and she spends $100 a week, we are going to spend nearly $1000 without each other knowing.

When not to use the 70 20 10 budget?

Most of the time it is good to follow some kind of a budget, but there are times and limits to the 70-20-10 budget. There are two things that could cause you not use a 70-20-10 budget.

The first one is when your income is so large that 70-20-10 budget rule don’t make logical sense. If you are professional basketball player making $10 million a year, you need to saving a huge amount of your income, versus spending it. Another example would be a successful business man that donates a large of amount to charity. These of course are exceptions.

The second is when your spending is temporarily higher. I disagree with many “zero debt” TV and talk show hosts because sometimes you will need to spend more or even go into …. debt. This doesn’t mean I am giving you a pass on spending or debt, just a few circumstances that are exceptions.

Medical Expenses: If I am faced with paying for unseen medical expenses outside my budget and savings, I will max out everything for them. Money is not that important to me or the health of my family.

New Business: Most of the time when you start a business or grow a business you are going to go into debt. You still need to have a budget and plan, but savings and giving may have to wait.

Unplanned Big Expense: Sometimes things happen that exceed your savings and you need to temporarily redirect part of your budget for it or take on debt. Normally you would pay for these things out of your savings, but sometimes you can’t. An example is when a family member or friend loses their job and you help support them. However, your car breaking down should generally be paid out of your savings.

What is the saving bucket?

Saving can be done in different ways, from 401k, IRAs, CD laddering or a 4013b retirement plan. It puts money away now so that it can be used later when less is coming in and for retirement. The important thing is to be consistently saving. I have seen many wealthy teachers that made very little, but save millions. A good way to start is a 401K with your employer. Always try to contribute the match, because it is like getting free money.

What is the sharing bucket?

Sharing is straightforward too. You can donate to a cause when they fundraise downtown or at the local mall, or you can even have a regular automatic deduction from your bank account going to a religious charity of your choice. My opinion is that money is useless in itself. Helping people is a great feeling

70 20 10 Budget Rule Summary

Remember, 70 20 10 is just the beginning. It is a recognition that budgeting will enable you to execute your financial plans effectively so that you reach your goals in due course. It is a tool that delivers financial stability. It also sometimes shows you starkly what you otherwise may be failing to see, that you are spending way above your earnings, which could lead to a rise in your debt, which could cause repayment issues later.

Of course, this is only a template. Each individual and each family is unique and will have a set of items on the list that are different, as will be the allocation to each.

“What can’t be measured can’t be managed” is a saying attributed to management guru Peter Drucker. He could have been talking about home budgeting.

Now you don’t even need to sit with a blank page and wonder where to start.

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