Budgeting Methods: 50/30/20 Rule
Budgeting methods: 50/30/20 rule
Having a well-thought-out budget can really help you regulate your finances. It prevents you from overspending and helps you put aside a fund for a rainy day — it’s really just a question of how you choose to go about it. If you haven’t come across it already, we’d like to introduce you to the 50/30/20 rule — a general budget plan designed to encourage you to think about the bigger picture and avoid overly complicated transactions. Want to learn more? Let’s dive in.
What is the 50/30/20 rule?
The 50/30/20 rule is a budgeting method created to simplify how much money you should spend on your:
- Needs = 50%
- Wants = 30%
- Savings and debt = 20%
Not only is it easy to follow, but it can help you get back on track or avoid financial stress. Having three clear categories to work towards can be more manageable than other overly complicated budget plans.
- Needs should make up 50% of your income. We’re talking mortgage payments, health care, transportation costs, food expenses, childcare costs and so on. Anything that’s mandatory or a necessity to your life is a ‘need’.
- Wants should make up around 30% of your income. Things like shopping sprees, trips abroad, entertainment and eating out all fall under ‘wants’. Though they aren’t mandatory, without them, life wouldn’t be half as fun!
- Savings and debt repayments should take up 20% of your spending. Whether you want to start an emergency fund or repay a debt of some kind, then it’s important you channel 20% of your earnings into making yourself feel more financially secure.
Where did the 50/30/20 rule come from?
The 50/30/20 was coined by popular professor and US Senator Elizabeth Warren and her daughter, in their book All Your Worth: The Ultimate Lifetime Money Plan.
How to apply the 50/30/20 rule: a step-by-step guide
So, now you know how the 50/30/20 rule works. The question is: how do you apply it to your own spending habits? Let’s take a look.
Spend 50% of your money on needs
Put simply, your ‘needs’ should be categorised as things that you simply cannot go without. Typically, your needs could include the following:
- Rent or mortgage payments
- Insurance costs
- Household bills
So, for example, if you take home £2000 each month, £1000 should go towards this category. However, if you find that your needs are mounting up to more than 50% of your income, it may be time to prioritise and whittle down the outgoings.
Look for areas in which you’re overspending. Is your expensive insurance up for renewal soon? Is your phone contract far more expensive than others you’ve seen on the market? Finding ways to chisel down your costs will help you work towards that 50% target.
Spend 30% of your money on wants
As for wants, these should be regarded as non-essential outgoings. For this category, 30% of your income should cover this — so if you were to take home £2000 after-tax income, you’d be left with a £600 ‘wants’ budget. Wants may include the following:
- Dining out or getting takeaways
- New clothes
- Class memberships
- Subscriptions (such as Netflix or Amazon)
- Trips abroad
Even if you’re spending over 30% on this area, it’s usually pretty easy to pull back, if necessary. As they aren’t essential outgoings, cutting them down shouldn’t be too difficult (in theory). Before dropping a lot of money on a ‘want’, simply ask yourself whether you really need the item in question. Levelling with yourself in this way can help you control any urge to impulse buy.
Put 20% of your money away for savings
After spending 50% of your income on needs and 30% on wants, you should be left with 20% to put into your savings or pay off debts.
Applying the 50/30/20 rule can really help make your savings pot look healthier. For example, if saving 20% of the £2000 after-tax income, which would be £400, then it would add up to almost £5000 after a year.
To help you stick to saving, opting for an easy access account, like our Instant Saver, is a great way to continuously feed money into your 20% goal, whilst also having the freedom to dip into it when you need it. With this type of account, you’ll be able to withdraw money whenever you want if you decide you want to spend or use it for other purposes.
However, if you’ve already saved up an amount that you’re quite happy with, you may have some interest in a fixed rate savings account, such as our Fixed Saver. You’ll usually get a higher rate of interest than most other accounts, but you must be comfortable with locking your money away for an agreed period. This means you won’t be able to access your funds freely like you would an easy access account.
Of course, if you have personal debts, such as credit cards or personal loans, you will need to appropriately put some of this money towards your repayments. If this debt is expensive with a higher interest rate than you’re getting from a savings account, then you should consider prioritising repayments over putting money into savings. This will ensure that your debt does not end up costing you more than you can save in the long run.
If you want to learn more, we’ve put together a guide to help you pick the best savings account for you.
Getting started with your saving journey: 3 top tips
1. Calculate your after-tax income
Seeing a lot of money drop into your bank account can be a very exciting thing — but that doesn’t mean you should spend it all at once. It’s important to factor in tax, before blowing your budget.
If you’re in a steady job and get a regular paycheck, it’ll be far easier to calculate your tax, as it’s usually done for you. However, if you’re a freelancer, you’ll need to calculate how much you earn in a month — minus your business expenses and the amount you’ve already set aside for taxes. Some find it easier to employ a personal accountant for this.
2. Categorise your spending for the past month
Review, review, review. When it comes to your spending, having a keen eye on your outgoings is the best way to keep informed and understand if the 50/30/20 rule is working for you. Look at your bank statement from the previous month and try categorising the expenditures into needs, wants and savings.
3. Evaluate and adjust your spending to match the 50/30/20 rule
Once you’ve categorised the different transactions, we suggest you aim to adjust your budget to fit your upcoming month. If you’ve got a heavy month in terms of bills and other essential expenses, try shrinking down your ‘wants’. Though it’s not a fun thing to do, cutting back on those more flippant spends will help you stick to your budget.