What Is The 70 Rule In Budgeting?

Budgeting is a critical aspect of personal finance. It is a process of creating a plan that outlines your income and expenses. Effective budgeting is necessary to ensure that you can meet your financial obligations, save for emergencies and future goals, and avoid debt. One popular budgeting rule that can help you manage your finances is the 70 rule. In this article, we’ll explore the 70 rules in budgeting and how they can benefit you.

What is The 70 Rule In Budgeting?

The 70 rule in budgeting is a straightforward guideline that suggests allocating 70% of your after-tax income toward your expenses, 20% toward savings and debt repayment, and 10% toward discretionary spending. The rule was popularized by Elizabeth Warren and Amelia Warren Tyagi in their book, “All Your Worth: The Ultimate Lifetime Money Plan.”

This budgeting rule is designed to help individuals and families achieve financial stability and security by prioritizing their essential needs while saving and having some discretionary spending. By allocating most of your income toward necessary expenses, you can ensure you have enough money to cover your bills and maintain your lifestyle.

The remaining 30% of your income should be divided between savings, debt repayment, and discretionary spending, providing you with the flexibility to build your financial future and enjoy some of life’s luxuries.

How to Apply The 70 Rule In Budgeting?

The 70 rule in budgeting is a simple guideline that you can follow to create your budget plan. Here are the steps you can take to apply this rule:

Step 1: Determine Your After-Tax Income

The first step in applying the 70 rule is determining your after-tax income. This is the money you have left over after deducting taxes from your paycheck. Be sure to include all sources of income, including any side hustles or investment income.

Step 2: Allocate 70% Toward Essential Expenses

Once you have determined your after-tax income, allocate 70% toward your essential expenses. You must pay these monthly bills, such as rent or mortgage, utilities, groceries, transportation, and other necessary expenses. Be sure to prioritize your needs over your wants when making your budget.

Step 3: Allocate 20% Toward Savings and Debt Repayment

The next step is to allocate 20% of your after-tax income toward savings and debt repayment. This includes building an emergency fund, contributing to a retirement account, paying off debt, and saving for future goals like buying a home or taking a vacation.

Step 4: Allocate 10% Toward Discretionary Spending

Finally, allocate 10% of your after-tax income toward discretionary spending. You can use this money to treat yourself or your family, such as eating, seeing a movie, or taking a vacation. However, be sure not to overspend on discretionary expenses and to prioritize saving and debt repayment first.

The Benefits of The 70 Rule In Budgeting

The 70 rule in budgeting offers several benefits, including:

1. Simplifies Budgeting: The 70 rule provides a simple and easy-to-follow guideline for budgeting. It can be an effective tool for individuals and families who struggle to create a budget plan that works for them.
2. Prioritizes Essential Expenses: By allocating 70% of your income toward essential expenses, you prioritize your needs over your wants, ensuring you have enough money to cover your bills and maintain your lifestyle.

3. Encourages Saving and Debt Repayment: Allocating 20% of your income towards savings and debt repayment can help you build an emergency fund, pay off debt faster, and work towards achieving your financial goals. This can help you become financially secure and improve your overall financial health.
4. Provides Flexibility: The remaining 10% of your income can be used for discretionary spending, allowing you to enjoy some of life’s luxuries without compromising your financial goals.
5. Reduces Stress: Following the 70 rule in budgeting can reduce financial stress and anxiety. Knowing you have enough money to cover your essential expenses, save for emergencies and future goals, and enjoy some discretionary spending can give you peace of mind and improve your overall well-being.

In conclusion, the 70 rule in budgeting can be useful for managing your finances effectively. You can achieve financial security and improve your overall well-being by prioritizing your essential expenses, saving and debt repayment, and discretionary spending.

Remember, the 70 rule is a guideline; you may need to adjust it to fit your unique financial circumstances. By tracking your spending and regularly reviewing your budget plan, you can achieve your financial goals and enjoy a more secure and stress-free financial future.