70-20-10 Rule

Table of Content

1. What is the 70-20-10 Rule?

2. How Does the 70-20-10 Rule Work?

3. Key Components of the 70-20-10 Rule

4. Integrating Life Insurance into the 70-20-10 Rule

5. Benefits of the 70-20-10 Rule

6. How the 70-20-10 Rule Can Help You Save for Retirement

7. FAQs on 70-20-10 Rule

What is the 70-20-10 Rule?

As mentioned, the 70-20-10 principle is a simple budgeting framework that assists you in managing your income in a practical way by dividing it into three portions. 

70% of your earnings are directed toward essential living expenses, i.e., rent, groceries, and utilities. 20% is allocated towards savings and investments. Allocating to savings/investments helps you build a rock-solid contingency fund and grow your wealth over the long term through long term investment options and strategies. 

The rest, i.e., 10%, is utilised for making repayment of debt or attaining essential life goals. Such goals may be purchasing an electronic gadget or funding a short term investment plan.

The average monthly income in India in 2022-23 was ₹19,166, with half the population earning even less than ₹8,750 each month, highlighting the need for flexible budgeting approaches and the importance of savings. The 70-20-10 Rule provides excellent flexibility, allowing individuals to manage their living expenses, save consistently, and work towards fulfilling life goals. 

By abiding by this framework, you can minimise debt, build discipline, and steadily move toward a balanced, secure financial future.

How Does the 70-20-10 Rule Work?

The 70-20-10 Rule works well by dividing your income into three defined portions to manage funds in an efficient manner. For example, if you earn ₹1 lakh every month, ₹70,000 must go toward essential living expenses such as rent, groceries, bills, and transportation. 

₹20,000 must be moved toward savings as well as investments. Doing so helps you build a contingency fund, invest in mutual fund schemes, pay premiums for a Life Insurance policy, or plan for long term goals, such as post-retirement. The rest of the amount, i.e., ₹10,000, is used for making repayment of debts or financing short-term financial goals, such as a vacation trip or purchasing an electronic gadget.

This approach balances out present needs with future planning. Also, it is flexible, i.e., you can tweak the percentages to match up with your lifestyle or financial objectives. Tracking your spending on a regular basis ensures you stick to the plan and make the most of every rupee.

Key Components of the 70-20-10 Rule

The 70-20-10 Rule divides your income into three essential portions to assist in managing money effectively while building a secure financial future. Each component has a specific role in balancing present needs and future goals.

• 70% for Living Expenses

This portion covers up all necessary month-on-month expenditures. These expenditures may be rent, groceries, utilities, Equated Monthly Instalments (EMIs) and transportation. Keeping your living expenditures below 70% of your income ensures you do not overspend on necessities and have sufficient room for savings plans and investment plan. 

This disciplined approach prevents lifestyle inflation and lays a rock-solid foundation for financial stability.

• 20% for Savings & Investments

20% of the portion must be directed toward savings and wealth-building vehicles, i.e., mutual funds, Life Insurance plans (such as term, endowment, or Unit-Linked Insurance Plans), Recurring Deposits (RDs) or an emergency fund. Making consistent investments of this portion assists you in growing your wealth over a long time and preparing you for unanticipated expenditures, which makes your financial plan resilient.

• 10% for Financial Goals

The remaining 10% is utilised for goal-based financial planning. These goals may be children’s higher education, purchasing a flat or for post-retirement. By setting aside a portion dedicated to future-related life goals, you can systematically work toward essential milestones without compromising your present lifestyle.

This structured split of income ensures a balanced financial life, combining prudent spending, consistent savings, and goal-oriented planning for long-term security.

Integrating Life Insurance into the 70-20-10 Rule

While the 20% bucket is primarily for savings and wealth growth, a portion of this allocation should be reserved for financial protection - and this is where Life Insurance becomes essential.

Financial Safety Net:

Paying premiums for a pure protection plan like Term Insurance ensures that your family's financial future is secured, even in your absence. This protects the 70% (living expenses) and 10% (financial goals) for your dependents.

Dual Benefit with Plans:

Plans like ULIP or Endowment policies blend investment with insurance. Allocating a part of your 20% to these can help you achieve long-term wealth goals while simultaneously providing a life cover.

Tax Efficiency:

Life insurance premiums often qualify for tax benefits under the Income Tax Act, 1961, making them a fiscally smart component of your 20% allocation^*.

By strategically incorporating the premium payments within the 20% allocated for savings and investments, you are not just building wealth, but also building an invaluable layer of financial security for your loved ones.

Benefits of the 70-20-10 Rule

Abiding by the 70-20-10 Rule offers many advantages, making financial management more straightforward and more effective.

• Simplifies Budgeting

This Rule provides a well-defined framework for tracking income and expenditures, without the need to rely on complex spreadsheets/tools. Knowing how much goes toward essentials, savings, and goals makes budgeting simple and free of stress.

• Promotes Saving and Investing

By allocating 20% of income to savings and investments, you ensure that wealth creation becomes a regular habit rather than an afterthought at the end of the month. This helps build an emergency fund and long-term financial security.

• Improves Financial Discipline

Sticking to the split of 70-20-10 encourages consistent and controlled spending, which minimises impulsive purchases and unnecessary expenditure. Over a long time, it fosters great financial discipline. 

How the 70-20-10 Rule Can Help You Save for Retirement

The 20% savings portion of the 70-20-10 Rule can be directed toward retirement-focused vehicles such as pension plans, the National Pension Scheme (NPS), or annuities. Systematic saving from an early age allows your corpus to grow through compounding, making retirement planning easier and stress-free.

For instance, someone beginning at the age of 25 years will accumulate considerably more by the age of 60 years than someone starting at the age of 35 years, even if both invest the same month-on-month amount. By abiding by this Rule consistently, you can enjoy disciplined budgeting while steadily creating a secure and adequate retirement fund.

FAQs on 70-20-10 Rule

1. What is the 70-20-10 Rule?

The 70-20-10 Rule is a simple budgeting framework that divides your income into three portions. 70% for necessary expenditures, 20% for savings and investments and 10% for debt repayment or financial goals. It assists you in managing money in an efficient manner while balancing out present needs and future planning.

2.  How can I adjust the 70-20-10 Rule for my financial situation?

The Rule is flexible. If your expenditures are lower or your goals are big ticket, you can tweak the percentages to match up with your lifestyle. Here, the key is to strike a balance among spending, saving and goal-related allocations.

3.  Is the 70-20-10 Rule suitable for people with variable income?

Yes. Even with irregular income, you can compute the percentages based on your month-on-month earnings and adjust them each month. Tracking your spending and prioritising savings ensures financial stability despite market fluctuations.

4.  Can I use the 70-20-10 Rule to plan for retirement?

The 20% savings portion can be directed toward retirement instruments such as pension plans, NPS or annuities. Consistently making an investment in such instruments can assist you in building a secure retirement corpus over the long term.

5.  How does the 70-20-10 Rule help in managing expenses better?

By allocating an income of 70% to necessities, the Rule sets a well-defined limit on month-on-month spending. This prevents overspending, promotes disciplined budgeting and ensures that savings/goals are not neglected.

6.  Can I use the 70-20-10 Rule for family budgeting?

The Rule works for individuals as well as family finances. It helps families plan regular expenses, savings, and goal-related spending, ensuring everyone's financial needs are met while building long-term security.