Budgeting allows you to track your spending, save for the unexpected, and take control of your finances. However, with 11.5 million adults in the UK having less than £100 in savings, it’s clear that effective budgeting is easier said than done.
That’s where the 50/30/20 rule comes in.
The 50/30/20 rule is a way to allocate your finances according to three categories: needs, wants and financial goals. Made popular by Harvard Law professor Elizabeth Warren and her daughter, the rule is a guideline to help normal working-class people create financially sound budgets.
What is the 50/30/20 rule?
The 50/30/20 rule sets out how to plan your budget after tax. Whilst it may sound complicated, it’s actually very simple and easy to apply. It essentially means splitting your money into 3 separate pots.
Broadly speaking, you should aim to budget 50% on needs (things that keep you alive such as rent, groceries and utilities), 30% on wants (such as hobbies, holidays, dining out or shopping) and 20% on savings or paying off debt.
When it comes to housing, whilst these come under your needs budget (around 50% of your income), it’s generally recommended that housing costs such as rent or a mortgage should amount to around 35% of this budget.
How to start using it
Sounds good, doesn’t it?
To take control of your budgeting, all you need to do is calculate how much money should be going in each pot. To do this, simply multiply your take-home pay by:
- 50 for needs
- 30 for wants
- 20 for savings or paying off debt
Once you have done this, you can start to split your money in each of the pots.
If you notice you have been significantly overspending, one way to get back in control is to review some of your utility costs. You could consider changing energy suppliers or reducing your food bills by shopping around if you are struggling to save towards life’s unexpected events.
How can it help with budgeting?
The 50/30/20 rule helps you stick to your budget and keep your finances in check. By having set budgets that you need to stick to and set spending thresholds, you’re more likely to think twice about overspending.
However, one of the benefits of the 50/30/20 rule is that, at its heart, it’s simple. If you create too many spending categories things can get complicated, which can cause problems. After all, if you can’t remember how much you should be spending in each category, you’re far less likely to stick to it!
If you tend to lose track of what you have spent, there are also some great budgeting apps that do half of the work for you, and will remind you if you are close to your spending limits.
Although budgeting can be scary, it doesn’t have to be. By implementing the 50/30/20 rule you can begin to take back control of your finances. If you stick to it, you will be well on your way to saving for your future or becoming debt-free.
Article by Born Realist