In my previous post, I eluded to a budgeting method called the 70-20-10, which when followed closely can help us feel more in control of our yield steady savings.

What is the 70-20-10?

The 70-20-10 is a budgeting method that suggests that you allocate your income as follows:

  • 70% of your income should be allocated toward your lifestyle
  • 20% of your income should be allocated toward debt reduction or savings (debt first)
  • 10% of your income should be donated or invested

Bonus tip!

Budget by percentages, not set dollar amounts. This will help you whenever your take-home pay fluctuates.

How to implement this plan

Step 1: Determine your monthly income

What is the dollar amount that you receive on a monthly basis? I don’t mean what is your pre-tax money, but what is the amount that actually enters your bank account? If you are tip or commission-based, you will need to find your average.

Step 2:  Gather your 12-month spending history

As daunting as this may be, whether you’re worried this is going to take longer than finalizing your taxes, or you’re simply terrified by what the results will yield (i.e. you spend 1/3 of your income on coffee consumption), this is an important step.  You need to get an accurate picture of how your money is currently being spent.  Start an Excel spreadsheet that displays every expenditure for the previous 12 months (you can do 3 months if 12 months is too daunting, but know it won’t be quite as accurate).

Step 3: Review and categorize expenditures

Once you have every single expenditure in place, review and categorize each as one of the following in an Excel spreadsheet:

  • Essential to survival (groceries, electric/gas, water, car, school, etc.)
  • Essential to quality of life (gym membership, social events, etc.)
  • Not essential…at all (i.e. unnecessary and frivolous expenditures)

Now determine the total of each category and divide by 12 to give you your monthly average (or divide by 3 if you only analyzed 3 months).  Are you pleasantly surprised, or are you aghast?  Now that you see the number, let’s see what your 70% figure should look like.

Follow along on the next post!