The 50/30/20 Rule And How It Can Help You Budget

Have you heard about the 50/30/20 rule? I must admit that until recently, it was a new one to me. But now I understand the principles, it makes perfect sense! The 50/30/20 rule is a simple way of budgeting your money by dividing it into three parts. The first part represents needs, the second wants, and the final part is for debt repayments or savings.

How  50/30/20 Rule Works

When you receive your income, divide it up using the following formula:

• 50% for Needs:  This is stuff you need to pay, your essential expenses.  In this category will be things like rent/mortgage, utilities, food, transport, insurance etc
• 30% for Wants: These are non-essential expenses that improve your life.  Entertainment, hobbies, dining out, etc
• 20% for Savings/Debt Repayment:  Depending on your circumstances, this will go towards savings or paying off debt.

Work Out Your Income

Start by calculating your monthly take-home pay. Add everything you earn, after taxes, national insurance, and other deductions.

Calculate Your Essential Spending

List all your essential monthly expenses. These are the costs you can’t avoid, such as housing, utilities, groceries, transport, insurance, etc. Try to keep these expenses within 50% of your after-tax income. For most of us, the rent/mortgage will be the biggest expense we have every month. If this exceeds 50% of your income, you might need to see if you can reduce your living expenses. We have an article about saving money on rent here.

Identify Your Fun Spends

Next, list your “fun” expenses. These are things that you enjoy but don’t necessarily need. Dining out, entertainment, subscriptions, and non-essential shopping fall into this category. Limit your spending on wants to 30% of your after-tax income.

 Savings and Debt Repayment

The last bit of your pot goes towards your financial goals. This includes building an emergency fund, putting money aside in a savings account or making extra debt payments to reduce it faster. Ideally, the aim is to save at least three to six months of living expenses for emergencies.

Adjusting the 50/30/20 Rule to Fit Your Life

While the 50/30/20 rule is a good starting guide, your financial situation might require you to make some adjustments.

• Debts: If you have a lot of debt, you might need to put more than 20% towards debt repayment. You could try reducing your spending on wants until your debt is more manageable.
• Low Income: If your income is low, your essential spending may be more than 50% of your income. Focus on cutting down on non-essential expenses and gradually work towards increasing your income through side hustles or boosting your career prospects.
• Higher Savings Goals: If you have a hefty savings goal, such as buying a house or early retirement, you might choose to save more than 20%.  Reduce your spending on wants to meet your goals faster.

The 50/30/20 rule is simple, flexible, and an easy way to approach budgeting. It’s definitely one of the most hassle-free ways I have seen to create a budget. Because I’m setting aside money for “fun” spending, it didn’t feel as restrictive as other budgeting plans I have tried.

Let us know if you have tried it and how you got on in the comments below.