The 50/30/20 Rule: A Complete Guide to Managing Your Money More Efficiently

Fed up of budgets you can't stick to? This is the answer you've been looking for

Maria Collinge
March 15, 2024
(Photo: Hong Nguyen/Unsplash)
Personal Finance
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Budgets are never fun. Often they're restrictive, unsustainable and never actually help you achieve your financial goals. We have a magic solution for budgeting and managing your money: the 50/30/20 rule, which (drumroll...) allocates 30% of your spending towards fun! Meanwhile, it factors in for the inevitable living costs and money you can stash away for your savings and investments, in a way that is doable and achievable.

The 50/30/20 rule is empowering tool for anyone wanting to take control of their finances and build the future they want. Why? Because it enables you to be in the driving seat of your finances - telling your money where to go instead of wondering where on earth it went. Wouldn't that be a fulfilling way to approach your budgeting?

Yes it would. So let's take the time to break down how the 50/30/20 rule works and how it can strengthen your financial mindset and position for the better.

(Photo: Jonathan Borba/Unsplash)

What is the 50/30/20 rule for budgeting?

Managing your finances can be a daunting task, but with the 50/30/20 rule, you can take control of your spending habits in a simple yet effective way.

The rule divides your income into three categories: needs, wants, and savings/investments. By allocating 50% of your income towards your basic necessities such as housing, food, transportation, and utilities, you ensure that your primary needs are met. The 30% you set aside for leisurely spending like going out to eat or seeing a movie, allows you to enjoy life without compromising your financial security. Lastly, allocating 20% towards savings, investing and debt repayment helps you build a safety net for the future. With the 50/30/20 rule as your financial guide, you can achieve your goals and be in control of your financial future.

Why should I use the 50/30/20 rule for budgeting?

It’s simple: the 50/30/20 rule gives you the power to take control of your finances and become financially literate. You will have clarity on where your money is going, while still allowing yourself some spending freedom - it's as balanced as budgeting gets! With this sustainable approach, you'll be in a better position to reach your financial goals and live life without worrying about money 24/7. Pretty nice, right?

Financial freedom requires financial discipline.

How to budget your money with the 50/30/20 rule

Budgeting can feel overwhelming, but the 50/30/20 rule simplifies the process into just three categories: needs, wants, and savings/investments/debts.

By breaking down your after-tax income into these categories, you'll have a clear understanding of where your money is going and the power to make informed decisions about your spending.

With 50% allocated to your needs, like housing and groceries, 30% for your wants, such as dining out or shopping, and the remaining 20% going towards savings or paying off any debts, you'll be able to stay within your means and avoid overspending.

Spend 50% of your money on needs

When it comes to managing our finances, understanding what we truly need versus what we want is essential. Needs are those necessary expenses that we simply can't avoid, like housing, utilities, and food and include things like:

  • Rental costs
  • Mortgage payments
  • Utility bills
  • Grocery costs
  • Transportation
  • Medical bills
  • Insurance

Example: If you have a monthly income of £2,500, £1,250 should be allocated to your needs.

(Photo: Hong Nguyen/Unsplash)

If you're finding that your expenses are eating into more than half of your take-home income, don't panic. Instead, take control of your finances and start making some empowering changes. Look for simple ways to cut back, like switching energy providers or taking advantage of supermarket deals. But don't be afraid to make more significant changes, like downsizing your living arrangements. Remember, by taking steps to bring your expenses down, you're creating a path to financial stability and freedom.

Spend 30% of your money on fun

By recognising that only 50% of our after-tax income is necessary for our basic needs, we free up the remaining 30% to put towards our wants - those non-essential expenses that make life a little sweeter.  Whether it's dining out with friends, travelling to new places, or indulging in a hobby, we all have wants that deserve to be prioritised. So, let's empower ourselves to live the life we truly desire by making room for the things that bring us joy. Things that fall into this category will include:

These may include:

  • Takeaway sushi
  • Holidays
  • Nights out with friends
  • Gym membership
  • Streaming subscriptions
  • Ballet lessons

Example: So if you're taking home £2,500 every month, you'd want to allocate £750 towards the fun stuff!

(Photo: Unsplash)

It's important to note, however, that what constitutes a 'want' under the 50/30/20 rule to one person may be considered a 'need' for another, such as a gym membership. There is no set in stone way of defining what goes into each category, and should be judged on your own individual approach.

It's also important to note that if you're spending over 30% of your income on the fun stuff, that's ok. It's worth considering finding ways to cut back on the fun stuff without restricting yourself of fun.

Carry out a quick audit of your budget and see if there are things you can cut back on. Is there a streaming subscription you never use? Are you only going to the gym once a week? Maybe it's time to cut those things out of your budget if you want to finetune your budget in line with the 50/30/20 rule for budgeting.

Spend 20% of your money on savings/investing/debt

Allocating 50% to your needs and 30% to your wants is a great starting point, but it's the remaining 20% that really counts. By directing this towards your savings and investing goals or extra debt repayments, you can feel confident in knowing that you are making progress towards a brighter financial future. Remember, even small steps can lead to big results. It could involve putting money towards

  • Investing
  • Savings for a house deposit
  • Student loan debt
  • Car loan debt
  • Emergency fund
  • F*** You Fund

Consistently putting aside 20% of your pay each month is a powerful way to create a more resilient savings plan. Whether you're aiming to establish an emergency fund or embark on a long-term financial journey, committing to this discipline can yield amazing results. By setting aside a portion of your income, you'll be able to move closer to your goals, whether that's buying a home or simply having a financial safety net.

How to apply the 50/30/20 rule: a step-by-step guide

If you are seeking financial stability, the 50/30/20 rule can be your guiding light. To begin implementing this simple budgeting rule, take a closer look at your income and categorize your expenses based on the 50/30/20 ratio. Here's some steps to follow starting today:

Step 1: Calculate income after tax

The first step is crucial: calculate your after-tax income. For freelancers, this means deducting business expenses and taxes from what you earn in a month. For employees with a steady paycheque, it's as easy as checking your payslip.

But don't forget to add back in any deductions for health insurance or pension funds. Armed with this information, you'll be well on your way to taking charge of your financial future.

Step 2: Categorize your expenses

Then it's time to get a true understanding of where your money goes each month. Simply grab a copy of your bank statement and note down the transactions you have made within a month. Then you can categorize them into categories like 'food', 'utility bills', 'leisure', 'savings'. Then double down and allocate them into the 50/30/20 rule categories of 'needs', 'wants' and 'savings/investing/debt'. This way, you'll have a clear picture of how you're spending your income.

(Photo: Unsplash)

Remember: Needs, like rent and utilities, are expenses that you simply can't live without. Wants, on the other hand, are extras that you could live without. Think dining out or splurging on new clothes. And savings are the icing on the cake.

3. Evaluate and adjust your spending to match the 50/30/20 rule

Knowing how much goes towards your needs, wants, and savings each month is a great start, but now it's time to really take charge by adjusting your budget to match the 50/30/20 rule. One of the best ways to do this is by assessing how much you're spending on your wants every month. It may seem daunting at first, but with a little effort and focus, you can easily identify areas where you can cut back and redirect that money towards more important goals, such as paying down debt or building up your emergency fund.

Get our 50/30/20 rule budgeting template

So you understand the 50/30/20 rule and why it's a crucial tool when striving for financial freedom. So where do you start? Thankfully, we have a ready-made template so you can allocate your budget effectively, all whilst turning into an actionable plan.

Is Excel not your forte? Not to worry - we've made it easy for you to get started. All you have to do is insert your own numbers. Buy your budget template here and get started on making a budget you can actually stick to.

With this powerful tool at your fingertips, you can confidently take ownership of your financial future and work towards your goals. Don’t let your finances control you - take control of them with a 50/30/20 rule spreadsheet.

Personal Finance

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