Money Management

How the 70/20/10 Budget Rule Can Help You Build Savings & Crush Debt

January 17, 2023

Budgeting can be tedious, especially for beginners. Yet without it, accomplishing any of your goals is impossible. With many budgeting strategies to choose from, it is essential you pick one that aligns with your immediate needs. If you plan to save money and pay off your debt, you should consider the 70/20/10 budget rule.

Percentage-based strategies like the 70/20/10 method can help you get started with budgeting. Percentages are used to determine how much you should spend and how much you should save. If you are in debt, you can dedicate a portion of your income to paying minimum monthly installments.

This article will explore what the 70/20/10 budget is, how to use it to save and pay your debts, and its pros and cons to help you decide if it is right for you.

What is the 70/20/10 Budget Rule?

The 70/20/10 budget is a percentage-based money management strategy that allows you to allocate your income in three categories - monthly expenses (70%), saving/investments(20%), and paying down debt(10%).

This method is ideal for anyone with many expenses, living paycheck to paycheck, or struggling to service their loans.

By separating your income into three categories, this budgeting rule allows you to save, invest, and lower your debt without straining. Here's an example:

Ann is a 30-year-old Surveyor earning Ksh65,000 net. After years of struggling to save and being in a never-ending debt, she decided to try a new approach— Use the 70/20/10 budget to kill two birds with one stone: save and pay the debt. Here's what her new budget looks like:

How does it Work?

Before you start using the 70/20/10 budget, you need to sum up all your monthly income. That includes passive income from investments that generate monthly returns. Second, if you are married and you and your partner have combined finances, factor in their income as well.

To get started on this budget, calculate all your expenses and keep them equal to or less than 70% of your total income. Then, save 20% of your income and set aside the remaining 10% to pay debts.

Additionally, you will need to understand each of your expenses and break them down further. If you plan to use 20% of your monthly expenses on food, prepare your food timetable beforehand to ensure you stay within your budget.

Here's a breakdown of how the 70/20/10 budget would work:

Spend 70% on Living Expenses

If, for example, your post-tax income (net salary) is Ksh70,000, your living expense will be Ksh49,000. This will cover all your monthly essential expenditures. For this budget to work, you should be able to live on 70% of your income.

The 70/20/10 budget doesn't separate needs from wants, meaning living expenses also cover your monthly entertainment and discretionary spending. And if you are a parent, childcare and other recurring child expenses will also be considered living expenses.

Here are all the living expenses that you will cover using 70% of your income:

Housing

Rent/mortgage
Utilities
Home maintenance
Laundry/Domestic manager
Home insurance

Transportation

Public transportation
Car repayment, maintenance, and other car ownership costs
Taxis and ride-sharing
Short traveling

Childcare (for parents)

Day care
Babysitting
Baby food, clothing, and other essentials
Toys and gifts
Extracurricular activities
Education insurance

Food

Groceries
Takeouts and dining out
Snacks

Discretionary Costs

Entertainment
Subscriptions
Personal care (clothes, shoes, grooming)

Health

Prescriptions drugs and other healthcare costs if you aren't insured
Over the counter painkillers
Health insurance

NB: If 70% of your income doesn't cover all your living expenses, you could be underearning or living above your means. Depending on which category you fall in, you should consider developing new sources of income or cutting expenses.

Save 20% of your Net Income

In the 70/20/10 budget, 20% of your net income is directed to your savings accounts or other investments. Life comes with many uncertainties, and the best way to ensure you are prepared for them is to increase your sense of financial security by saving. Saving and investing can provide a financial backstop and is the only way to plan for financial goals like homeownership and retirement.

While it's recommended that you know what you are saving for, this method doesn't specify what you should prioritize. You can put away 20% of your monthly income until you can use it for financial gain or direct it to a specific savings/investment account.

If your after-tax income is Ksh70,000, you will have to save Ksh14,000 per month. Ideally, you should do this immediately when you receive your paycheck. At the end of the year, you will have saved Ksh168,000.

You can save or invest all this money in one vehicle, but you should diversify to lower your risk exposure. This can guarantee higher returns and prevent you from experiencing devastating losses. You should pick different saving and investment instruments and alternate between them. If you saved in Account A this month, save in account B next month, and invest in Account C the third month.

The 20% you put away can be directed to different saving categories. Some common ones are emergency funds, retirement contributions, college savings for your children, homeownership, starting a business, or sinking fund for future purchases.

Here are some examples of investment and saving vehicles that are common in Kenya.

Saving Vehicles

Bank saving and checking accounts
SACCOs
Money Market Funds (MMFs)
Chamas and table banking
High yield savings and fixed deposits

Investment Vehicles

Stocks and shares
Treasury bills and bonds
Pension schemes
Real estate investment (e.g., REITs or buying land in hire purchase)

Use 10% to Pay off Debt

The remaining 10% on this budget rule will be allocated in paying off your debts. Since more significant debt such as mortgage and car loans are covered in the 70%, this portion of your salary will be for paying off the smaller loans like different consumer debts.

Consider this case:

Akinyi earns a Ksh60,000 net salary. Over the years, she has been in a consumer debt trap that has prevented her from progressing financially. Her total debt stood at Ksh114,000 – almost double her salary. She subscribed to the 70/20/10 budget to pay off her debt while ensuring she saves money.

Akinyi plans to be debt free in two years. She took a personal loan of Ksh120,000 after her husband agreed to be her guarantor to consolidate all her debts. With only one debt to settle now, she plans to service the loan using 10% of her salary – Ksh6,000. It will be enough for her to pay installments plus interest every month.

If you are not like Akinyi and can’t consolidate your debts, you can pay off your debts using 10% of your income by employing either of these strategies:

Debt Snowball Method: Start by paying off the smaller debts and move to the largest one.
Debt Avalanche Method: Start by paying off the high-interest loans that will cost you more money in the long term.

How to Use the 10% When you Don’t have Debt

The 70/20/10 budget rule can also be helpful for people who don’t have any debt or have finished paying off all their debt. If you are one of those people, you can give your 10% a different usage. Here are three use cases you can consider.

Retirement Fund: While you might have already covered retirement contributions in the saving and investment category, you can future-proof yourself by creating a backup fund or maxing up your existing one. This strategy could be particularly attractive if your want to retire early.

Black Tax: If you have elderly parents or other family members that financially depend on you, you can allocate 10% of your income to supporting them.

Donation and Charity: This will take the form of tithing or other religious giving. You can also allocate this portion of your salary to support grassroot NGOs and community organizations that sponsor causes you believe in.

Pros and Cons of 70/20/10 Budget

Pros

It is easy to understand and implement even for beginners
It can easily be adjusted to reflect your current financial goals - the 20% can be used to pay off loans if you are deeply in debt, and the 10% can be put into savings.
It can help you account for monthly expenses specific to you, such as black tax or donations. Most other budgets don’t offer that.

Cons

The 70/20/10 rule doesn’t help separate needs from wants, forcing you to break down your budget further and allocate everything individually
It assumes you can live on 70% of your income, and 10% can help you meet your minimum monthly debt repayment. This might not work for some people
Putting aside 30% of your income can be impossible, especially for beginners. It could require a complete lifestyle change that might push them away.

WRAPPING UP

Budgeting is one of the best ways to take control of your finances. It prevents you from wasting money by tracking your expenses and guarantees your future by making sure you save and invest a percentage of your income. For the 70/20/10 budget to work, you first need to stick to its principles. That means keeping your living expenditure at 70%, saving at 20%, and paying off debt at 10%.

You can create an excel spreadsheet to help you break down each of your expenses to keep them within the ratio that the budget recommends. That will also allow you to track your spending and remove any leaks in your finances.

If the ratio doesn't work, you can consider trying different methods. For instance, if you don't have any debts and are underearning, the 50/30/20 rule can suit you better. It separates needs from wants, allowing you to free more money to save and build up your finances.

Finally, don't be afraid to adjust the numbers to suit your needs. If you are relatively earning well and have fewer responsibilities but a lot of debt, you can switch to the 60/20/20 format. This will keep your expenses low, allowing you to save and lower your debt burden.

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Farah Nurow is an experienced Content Writer who enjoys writing creative and educative articles meant to provoke readers' thoughts. He loves sunny weather and thick books. You can connect with him on LinkedIn.