What is the 50/30/20 savings rule and how could it simplify your budget?
You really can’t underestimate the importance of having a good budget in place. When you know how much money you’ve got to spend, it takes away a lot of the guesswork and stress that can surround our finances. But there are many ways to set up a budget, and the key is to find the one that works for your income and lifestyle. Today, we’re going to look at one popular approach to budgeting, called the 50/30/20 rule.
What is the 50/30/20 rule?
The 50/30/20 rule is an approach to spending and budgeting. The idea is that you divide up your income (after tax) and spend 50% of it on essentials (the things you need) then spend 30% on things you want, and set aside the last 20% of your income as savings.
Some examples:
50% on needs, like rent or mortgage payments, household bills, regular food shopping, or travel to and from work
30% on wants, like a takeaway meal, cinema tickets, or a holiday
20% on savings. This could be saving up for something special, or building up your emergency savings fund
There might be some items that could fall into more than one category, and you’ll need to decide where they belong. For example, there are times when buying new clothes will count as essential: making sure your family all have shoes that fit, for example, or warm winter coats; but there can also be instances where clothes shopping is a treat rather than something you need.
Who is the 50/30/20 rule for?
While rules like the 50/30/20 budget can be a helpful way to make decisions about your spending, we know that there’s no one-size-fits-all when it comes to budgeting. The 50/30/20 rule can work well for someone with reliable, disposable income, who wants to get into the habit of saving a bit each month. It’s not so useful for someone on a really tight budget, where 100% of your income has to be spent on essentials like bills, rent and food shopping.
What are the pros and cons of the 50/30/20 rule?
It’s a simple way of getting into the habit of budgeting, with just three categories to consider. Having a set budget for ‘wants’ can relieve any feeling of guilt about spending on non-essentials, while still making sure you don’t spend more than you can afford. If you consistently earn double the cost of your ‘needs’, then the 50/30/20 rule could work for you and help build a habit of regularly saving money. And if you are able to save up, it’s definitely a practice worth following, so that you’re prepared for whatever the future holds.
The simplicity of the three categories also gives you some flexibility. One month, your 20% savings allowance might get split between saving up for a holiday and setting aside money for Christmas presents. But if the following month you had an unexpectedly high MOT bill, or your washing machine suddenly broke, you could use your 20% to top up your emergency savings fund. As long as you’re still saving, and not going outside your spending allowance, you have the freedom to decide how you use your money from one month to the next.
However, there are scenarios where the 50/30/20 rule isn’t going to work. If you’re trying to save up quickly for a particular purchase, then rigidly following a rule that sets a limit on how much you save could slow that process down. And if the amount you need to spend on essentials takes up significantly more than half of your income, then of course you wouldn’t have as much left over for the other categories, meaning you’d have to cut back on ‘wants’, savings, or both.
Looking for the budget that’s right for you?
If the 50/30/20 rule works for you, that’s great! But don’t worry if it just doesn’t fit with your lifestyle or income right now.
It’s important to have a budget that works for you, and that’s the right fit for your approach to money. Never thought about how your mindset affects your spending? Take our money personality quiz to find out more.
