The 50/30/20 Rule
The 50/30/20 budgeting rule is one of the simplest ways to manage your money, helping you balance essentials, lifestyle spending and future savings.
It’s a pretty cool tactic, allowing for a lot of freedom whilst also steering the ship in the right direction.
The Basics of the 50/30/20 Rule
After tax, you divide your income into:
50% for Needs
30% for Wants
20% for Savings
Pretty simple I think but we can get a bit further into it.
Needs - 50%
Stuff you can’t go without or avoid. Everybody’s will be different so here are some suggestions of what might be included:
Rent or mortgage.
Utilities like water, electricity, gas, phone, internet.
Food.
Transport to and from work or school.
Legal obligations like child support.
Minimum debt payments.
Clothing essentials.
Wants - 30%
The fun stuff that makes life worth living.
Holidays and travel.
Entertainment and nights out.
Clothes (more than essentials).
Hobbies and crafts.
Home decorations.
Savings - 20%
The stuff that adds to your net worth.
Adding to your savings or investments.
Paying into your pension (I’ve got a bit to say about this underneath so bear with).
Debt payoff over the minimum amount.
Mortgage payments over the minimum amount.
More thoughts on the 50/30/20 method:
What do you do if your essential spending is over the 50%?
Well, you either cut it down or you work on ways to increase your income.
With the cost of living as it is, this is a reality for lots of people but I believe that if it is true then it’s true whether you’ve considered it or not. So better to be aware, and in a logical, rational way than let a secret panic be building in the background.
Get ahead of it.
What do you do if your fun spending is over 30%?
I think you know the answer. Sorry. 😭
I’m not sure if this particular thing goes in fun stuff or essential stuff?
The first example that comes to mind is something like a super duper phone contract or internet with all the bells and whistles.
Nowadays some stuff which would certainly not have been essential 20 years ago are just an absolute part of life - how would you access banking without the internet now the high street banks are all closing? Lost your job? Good luck finding and applying for any positions without it!
So I think we can cut ourselves some slack that maybe an older generation wouldn’t but we also have to be truthful to ourselves. If we had no source of income and our savings were depleting, would a Disney+ package really cut it?
You get to decide. I think it’s perfectly acceptable to split a bill by percentage between the Needs and Wants categories if it belongs to both however…
How closely should I be looking at this?
Probably not that closely… This is a broad brush approach to check in on whether you are headed in the right direction. It’s a great place to start, especially if you’ve never thought in these terms before but, as simple as it seems, it can get a little messy when it brushes up against real life. For example:
The pension question.
Pensions are undoubtedly within the Savings category. They increase your net worth and they are you saving for your future.
But with a workplace pension, the money leaves your pay packet before you see it and your employer adds a little somethin’ somethin’ too. You may have salary sacrifice set up. So all that needs to be accounted for too.
My feeling is you’d be best to add those back into your income and then deal out the payments to whichever is the appropriate section (if you’re using salary sacrifice for childcare vouchers for example, that would go within the Needs section rather than Savings).
There’s a fair bit of discussion online (particularly the financial Reddit forums) that once you’ve got to the salary sacrifice stage, you’re probably further along than the 50/30/20 rule would be useful for. And I can see what they’re saying. I also know though, from personal experience and a lot of chatting to this audience, that we can get all tangled up making the right choices when things occur without having a view of the wider circumstances.
So maybe you are directing lots of your income to your pension to get an employer match (which I think is a great idea generally!!) but maybe you also have no idea of your net worth. I think there are a lot more people in that situation than Reddit would think about and I think the rule can help in that situation as a way to focus the mind.
So that’s my basic breakdown of the 50/30/20 rule.
Tomorrow I’ll talk you step by step through how to implement it for your finances.
As always, feel free to ask any questions down below!
Love Eleanor. xxx
P.s. Just checking through my facts and I had absolutely no idea that this was first devised by Elizabeth Warren in a book called All Your Worth which has been on my to-read list for quite some time but has just jumped to the top!
