How to Apply the 70-20-10 Rule — Step by Step

The formula, in one paragraph

The 70-20-10 rule splits your after-tax pay into three shares: 70% for needs, 20% for wants, and 10% for savings. Each share is your monthly pay times the percentage divided by 100. The annual savings is the monthly savings times 12, and the five-year savings is the monthly savings times 60, with no interest. The months to save one month of needs is the needs divided by the savings. That is the whole rule.

Step 1: Start with after-tax pay

Start with what lands in your bank account, not your salary. The rule is worked out on after-tax pay, because tax is not yours to split. At the example pay of $5,000 a month after tax, that is the number every share is worked out from.

Step 2: Needs are 70%

Needs are what you must pay to live and work: housing, utilities, groceries, transport, insurance, and minimum debt payments. At $5,000 a month, the needs are $5,000 times 70%, which is $3,500.00. If your needs add up to more than $3,500.00, write down the real total and use the adjustment later in this guide.

Step 3: Wants are 20%

Wants are what you choose to enjoy: dining out, streaming, travel, and hobbies. At $5,000 a month, the wants are $5,000 times 20%, which is $1,000.00. The line is not always sharp: a phone is a need, the newest phone is a want, and groceries are a need while takeout is a want.

Step 4: Savings are 10%

Savings are what goes to your future: extra debt payments and investing. At $5,000 a month, the savings are $5,000 times 10%, which is $500.00. Extra debt payments count as savings, because they are money going to your future, not money spent today. The minimum debt payment is a need: it is the amount you must pay to stay current.

Step 5: What a year of saving looks like

The monthly savings of $500.00 becomes $500.00 times 12, which is $6,000.00 in a year. Over five years it becomes $500.00 times 60, which is $30,000.00, with no interest. That is the point of the 10% share: it looks small month to month, and it adds up to real money over a year.

How long to save one month of needs

One month of needs is $3,500.00, and the savings are $500.00 a month, so $3,500.00 divided by $500.00 is 7.00 months to save one month of needs. After 6 months you have $500.00 times 6, which is $3,000.00 saved, and that is 0.86 months of needs. The months to save one month of needs is the needs share divided by the savings share.

The 60/25/15 variant

The 70/20/10 split is a starting point, not a law, and the most common variant is 60/25/15. At $5,000 a month, the needs are $3,000.00, the wants are $1,250.00, and the savings are $750.00. The annual savings are $9,000.00, and the five-year savings are $45,000.00. One month of needs takes 4.00 months to save. Five points more of savings cuts the wait from 7 months to 4.

Working backwards from a target

The rule also runs backwards. The income for $1,000 a month of savings at 10% is $10,000, because $1,000 times 100 divided by 10 is $10,000. The savings rate for $800 a month of savings on $5,000 is 16.00%. The income where wants are $1,500 a month at 20% is $7,500, and the needs then are $5,250.00. The income where needs are $4,200 a month at 70% is $6,000.

When needs run over 70%

In a high-rent city the needs share often runs over 70%, and the fix is to cut the wants first. An 80/10/10 split on $5,000 gives needs $4,000.00, wants $500.00, and savings $500.00. If needs are over 80%, the answer is not a better split: it is more income, a cheaper home, or a roommate.

What NOT to do

Do not work the rule out on your salary before tax: the split is for after-tax pay. Do not count the minimum debt payment as savings: it is a need, and only the extra payment is savings. Do not set the wants to zero: a budget with no fun in it is a budget you will abandon.

That box is the whole formula.