How to Use the 50/30/20 Rule: A Step-by-Step Guide with Examples

So you’ve been inspired by the last blog on the 50/30/20 method but want to know how to use it in real life?

Say no more.

A Step By Step Guide to the 50/30/20 Money Management System

Past Results - Assessing What’s Already Happened.

1). Dig out, or download, a months’ worth of expenses.

This might be your bank statement/s and your credit card statements, or if you’re a cash kind of person then it’s receipts.

2). Grab three colourful pens.

Or maybe a black biro, blue biro and a pencil if you’re not a stationery human. One’s going to be for Needs, one for Wants and one for Savings.

It’s really important before we start the next bit, especially if this stuff stresses you out, to take a moment to calm your nervous system. We’re not judging. What’s happened has happened and you know you’re a good person just doing your best even if some crappy choices come up. This is just data, and it’s going to help you make better choices now.

3). Highlight each outgoing according to where they fit.

If there’s something you’re not sure on leave it to the end, you might feel a bit more confident once you’ve done a month’s worth of decisions.

4). Now you need some sort of layout.

This could be a spreadsheet on Excel or Google Docs or something like that, or it could be a layout in a bullet journal or notebook.

For our purposes you need four separate sections - Income, Needs, Wants and Savings.

Within those sections you need columns for the date, amount, description of what it is and a running total.

I also suggest a notes column for things like ‘this feels like a big mistake and it’s making me anxious’ or ‘I want to downgrade this subscription’ etc. The point of doing this is, to not get caught up in the feelings or nostalgia, get it out and you can assess it later which allows you to continue with the main process.

Go ahead and fill in your expenses for the month (or a week if a month feels too much!).

50/30/20 Rule Budget Maths Explained - Don’t Panic, Grab a Calculator.

Or let the spreadsheet do it for you.

5). Add the Needs, Wants and Savings sections together and compare that to the income section.

For wealth creation we’re going to need the outgoings sections to be the same or less than the income section, otherwise we’re spending more than we’re earning. If that’s not the case, no panicking. The facts exist anyway, it’s just that now we know that which is great!

6). The second bit of maths we need to be doing is the percentages.

If you can work that out yourself, go for it! The rest of us…

• Take the total from the income section and divide it by two. That gives us the 50% figure for the Needs section.

• To work out the Wants, divide that 50% figure by 5 and multiply that by 3 which gives you 30% of the total.

• And to work out Savings, divide the 50% figure by 5 and multiply that by 2 which gives you 20%.

7). Now we need to compare those four numbers to our actual figures from step 4.

We have our total income, and from that we have what our Needs, Wants and Savings should look like according to the system. How is it looking? Is one section looking particularly heavy? Or too light? Are you spending or saving more or less than you want or thought?

Next Steps in the 50/30/20 System

8). One month isn’t a lot of data, so I’d be repeating this process for the previous few months to get a feel for the pattern before making any judgements. It’s also a pretty low effort financial assessment to carry forward regularly, perhaps on a monthly financial date night.

9). As much as I want you to not panic, if your income vs outgoings or the 50/30/20 model are wildly out of balance you will have to make some changes.

This might include cutting back but it could include renegotiating contracts, downgrading subscriptions, making the most out of cashback offers, increasing your income through an extra job or hours, selling bits on Ebay. It might include much bigger decisions like moving to a smaller house or leaving the kids in the woods (just joking, obviously).

10). Finally, cast your eye back over the notes columns.

Get anything that needs to be done either done, or written on your to do list/calender so it doesn’t get forgotten.

Let the more emotional notes wash over you, are there any connections? For example, maybe there are more emotions attached to the Wants section - it’s quite common to feel guilt or shame there. Are your Wants truly your Wants and not everybody elses?

No need to change your entire life here, but notice and take forward, it could well alter how and where you spend your money in this coming month.

Common Problems with the 50/30/20 Rule

• Variable income means the allocations vary wildly.

  It’s going to be more important if this applies to you, to take a longer view on this so make sure you’ve assessed a full six months and perhaps employ some averages rather than comparing outgoings and incomings for each individual month.
  Stay tuned for some solid ideas on smoothing out the income rollercoaster.

• Cost of living is making the Needs much more than 50%.

  Honestly, this system isn’t going to work for everybody. It’s a shitty reality that life is more expensive if you’re poor and these are simply guidelines not laws.
  Get what you can out of it. Spending time with your figures in a focussed and calm way is a huge step.
  Make sure to note any emotional responses or sensible thoughts like ‘I could definitely get this cheaper somewhere else’ or ‘maybe next time I could car share with Anna to halve the cost’.
  Reallocate the boundaries so that they work for you, but note the importance of the balance. So maybe your needs are 70% but it is imperative that you are both saving for your future (and read the notes on that from last post, it’s not all stuffing money into a 3% savings account) and also that you’re spending a little on the joyful things in life.

• Savings are too low.
  Pay. Yourself. First.
  Next time you get some money in (salary or an invoice paid), get that 20% allocated to your Savings goals. Again, that’s not necessarily whacking it away in a 3% savings account - it could well be paying off debts or building an emergency fund.

• For the sake of simplicity we didn’t cover adding back in pension, salary sacrifice or student loans here. But if that applies to you, grab your payslip, add the figures back into your income section and then allocate appropriately to the outgoings sections.

Hope this helps! If you want more simple money management tools and nuanced finance thoughts, make sure you’re signed up to the newsletter!

Love Eleanor. xxx