Tips for Budgeting: Using the 50/20/30 Rule

Budgeting Tips for Personal Finance

The 50/20/30 budget rule is a way of adding structure to your weekly or monthly pay checks without being too restricting. If the idea of having a colour-coded Excel spreadsheet documenting all your expenses fills you with horror, then the 50/20/30 approach may be more suitable for you. It’s a simple framework to help you allocate your money without you needing to keep track of absolutely everything you spend or buy.

The rule states you should divide your salary into three parts – your essential needs, your savings and debts, and your wants. Your essential needs will take up 50% of your payment, your savings and debts 20%, and your wants 30%. This may change from time to time. For example, if you are heavily in debt, the 20% may need to be increased at the expense of your wants. Or if you are planning a holiday, your wants may take priority for that month. However, besides certain unique circumstances, the 50/20/30 rule will give you an idea of how to budget each month.

50% – Your Essential Needs

This category includes everything you need to survive each month. These are items such as your rent or mortgage, utilities, medical prescriptions, food, and minimum payments on any credit cards. Food includes everything from the supermarket and not from restaurants (eating out counts as your wants). If something is vital for a decent life quality (i.e. the basic necessities to survive) or to maintain a good credit rating, then it counts as an essential need.

In 2016, the average monthly wage for employees between the ages of 30 and 39 was between £2,331 and £2,535. For this example, let’s say your monthly payment is somewhere in the middle of the average and you receive £2,400 per month (for calculations sake, we’ll say this is after tax has been deducted). This means, £1,200 should be allocated to all your basic needs.

20% – Your Savings and Debts

Set aside 20% of your monthly salary to pay off debts and invest in the future. For example, for debts this will include any payments into retirement accounts and paying off student loans and credit card payments. The rest can then go into savings and investments. If you are totally debt free, then this entire 20% can go straight into savings. If you’re unsure the best way to invest your money for maximum returns, speak with a financial advisor who can let you know all the options available to you.

Going back to your £2,400 monthly income. £1,200 has already gone on your basic needs and now you have £1,200 left over. £480 of this should go towards your debts and savings. Remember though, if your debts are higher, increase this proportion and reduce the amount of salary you allocate to your wants. This will be temporary until your debts are all paid off.

30% – Your Wants

This is probably the bit everyone loves – the part of your salary that goes on whatever you want. These are the things you could live without but you want to have in your life as it makes you happy. This could be anything from dance class and an evening language course to nights out in bars and fine-dining in restaurants. This is also the money for holidays, clothes, a fancy new car, a new kitchen, and anything else that you really want but don’t exactly need to survive.

After allocating £1,200 on your basic needs and £480 on debts and savings, this leaves you with £720 per month to spend on whatever you want.

 

The 50/20/30 rule is a simple framework to help you manage and budget your monthly salary. The percentages are not fixed and may be adjusted to suit your circumstances. However, it’s important to calculate the ratio that’s best for you and then follow it each month. Try not to stray too far from your budget, otherwise it becomes easy to slip back into a laid-back approach to your finances.

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