The 50/30/20 rule can be a great way to maximise your income and increase your financial security.
The 50/30/20 rule is a popular budgeting tool designed to help individuals manage their finances and financial goals effectively. This method is designed to help you decide where your money’s going and see where you could make some positive changes. It can be a great way to make sure you not only pay your bills but also have money set aside for the more fun things in life and to further your financial health for later in life.
The 50/20/30 rule is only a guide; you can split your income into whatever works best for you and your budget, and everyone will be different depending on their financial situation and how much spare money you have every month. We are still slap-bang in the middle of a cost-of-living crisis.
The rule may not suit everyone; you may or may not have anything spare from your income right now, and If your spending/income doesn’t fit the 50-30-20 rule, that’s okay, but this budgeting method can be a great first step to maximise your savings goals, no matter how much spare money you have.
How does the 50-30-20 budget method/rule work?
The idea of the 50-30-20 rule is to split your net income (take-home income or total monthly income) every month into three budget categories - your needs, your wants and your savings. In an ideal world, you'd set up automatic transfers/direct deposit for your funds to go from your main bank account to a separate savings account every month to have the money in the right place for your needs/wants. Sending money manually tends to happen less frequently as it's easy to forget or be swayed to spend your money in other ways!
Budget Breakdown Spending Categories
50% for Needs: This portion covers essential expenses/ that are necessary for survival and well-being. Half of your take-home pay should be allocated to expenditures that you need to make every month. Examples include:
Rent, mortgage payments or important debt payments
Utility bills (electricity, water, gas)
Groceries
Transportation costs (fuel, public transportation)
Health care expenses/ health insurance
Car payments
Student loans
30% for Wants: This category includes a 30% portion of your income for discretionary spending—so some extra money put aside for items and activities that enhance quality of life but are not an essential cost. Examples are:
Dining out and entertainment (movies, concerts)
Hobbies and personal interests
Subscriptions (streaming services, magazines)
Holidays, nights away and travel
20% for Savings: The final portion is dedicated to future financial stability. This might be putting money away to clear outstanding debts/debt reduction or putting money away as a rainy day fund or emergency fund. This could include:
Contributions to an emergency fund
Putting money away for retirement
Investments
Paying down debt beyond minimum payments for faster repayment, such as clearing your credit card balance as quickly as possible, which is especially useful for paying off high-interest debt faster and saving you money on interest.
Unexpected expenses
Implementation of the 50/30/20 rule
To apply the 50/30/20 rule, start by calculating your monthly income after taxes. Then, allocate your income according to the percentages outlined above. For example, if your monthly take-home pay is £1,800:
Needs: £900
Wants: £540
Savings: £360
Benefits of the 50/30/20 rule
The primary advantage of this budgeting rule is its simplicity. Limiting spending to three categories reduces the complexity often associated with detailed budgeting methods. It encourages individuals to prioritise essential needs while allowing personal enjoyment and savings growth.
Additionally, this framework can be adjusted based on personal circumstances. For instance, if saving 20% feels too ambitious, one might consider lowering that percentage temporarily while still aiming to adhere to the needs and wants allocations. Equally, many of us these days will easily spend half of our take-home pay on our needs; I know my needs are more like 90% of my budget, but if that's the case, then use this rule for when you might have extra funds one month, or if you start a side hustle and then use the rule for the extra side hustle cash, instead of your primary income, as that will work too; it doesn't really matter, just so long as you are trying to use the budgeting strategy in one way or another!
The 50/30/20 rule is a flexible guide for managing finances, promoting a balanced approach to spending and saving that can adapt to individual financial situations. Financial success works best when you analyse your spending habits and plan how to manage your money. It's so easy just to spend what spare cash you have on unnecessary things, and being more disciplined with how you spend your income can really pay off, especially if you need to make use of your emergency savings on something like a new washing machine, or you want to go away on holiday, as you have money set aside. This 50/30/20 spending method takes the mental stress as well as the financial stress out of your monthly budget and sets you up with an ultimate, yet flexible, lifetime money plan.
