It’s important to remember that personal finance is very personal, and the 50/30/20 budget is just a rule of thumb, although a very useful one.
Budgeting can be an intimidating word, but it simply means making a plan for your money.
There are various ways to budget, one of which is the percentage-based budgets, of which the 50/30/20 budget rule of thumb is an example
Learn about the six different types of budgets.
This article will teach you about this method and how to apply it to your finances.
The 50/30/20 budget is an intuitive and simple way to budget that does not require a detailed breakdown
It aims to help people reach their financial goals without the hassle of a complicated plan.
With this rule of thumb, you divide your monthly after-tax income into three spending categories: 50% for needs, 30% for wants, and 20% for savings/debt repayment.
It is not a hard and fast rule, but rather a simple guide to assist you in developing a good financial structure to manage your finances.
The 50/30/20 budget rule was inspired by Elizabeth Warren and her daughter, Amelia Warren Tyagi, in their 2005 book All Your Worth: The Ultimate Lifetime Money Plan. Based on more than two decades of research
Warren and Tyagi came to the conclusion that all you need to do is use the 50/30/20 rule to balance your money between your needs, wants, and savings goals.
The 50/30/20 budget rule of thumb helps you tackle overspending and under-saving.
This is especially helpful if you’re new to budgeting and don’t know how much you should be spending on what!
Here’s how to put this rule into practice:
This is your take-home pay after deductions, taxes, and so on. It is the amount that is actually deposited into your bank account.
Make sure to include all sources of income when calculating e.g If you have several jobs, a side hustle, rental income, and so on,
If you are self-employed or have a fluctuating income, use an average or an estimate of the income you expect to receive in a particular month.
This step involves looking at your expenses, listing them out and categorising them into different categories (Needs, Wants and Savings/Debt payment)
If this is your first time budgeting, get your account and credit card statements for the last three months to determine where and how much you are spending.
Don’t forget the one off’s or yearly expenses that might not be captured in the current statement
You can now see how much of your money goes towards your needs, wants and savings each month,
You then adjust your budget to match the 50/30/20 budget rule
According to this rule, half of your net income should be spent on necessities, which are expenses that you cannot live without.
This will vary from person to person and are the bare bones of your spending.
Rent or mortgage, council tax, utilities, transportation, food, personal care, and minimum debt payments are examples of these expenses.
Your wants consist of things that make your life more enjoyable but are not considered essential.
Here’s are some common examples of wants: movies, music, eating out, phone and laptop upgrades, holidays and weekend trips
This category as the name implies involves your savings (emergency fund, savings goal), investments (retirement account) and extra debt repayments
This category is important because you are building for the future
Track your expenses each month and make changes as needed to stay on track with your plan/budget.
Tracking your progress holds you accountable.
Having your expenses paid automatically reduces your effort even more
This should be done on a regular basis, perhaps yearly, to ensure that every expense is still necessary, i.e. paying for what you truly want, and to identify areas where you can negotiate.
So, if your monthly income is £3,000 after-tax, the 50/30/20 split means you will spend:
It’s fine if your spending doesn’t fit the 50-30-20 rule. However, if it is a realistic goal for you, it may provide you with a good target to aim for.
With the 50/30/20 budget rule you have a simple plan to manage your finances that covers your needs, wants and savings/debt payments
Further Reading
