What is the 50 30 20 rule?

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The 50 30 20 rule aims to simplify budgeting by dividing your after-tax income into three categories. This page explains what the 50 30 20 rule is, how it works, and how you can use it to achieve your savings goals.

Key takeaways
  • Simple budgeting rule: the 50 30 20 rule divides your income into three categories

  • Discipline: in order for it to work, you have to be disciplined with your spending

  • Not a one-size-fits-all approach: it may not be suitable for everyone

What is the 50 30 20 rule?

The 50 30 20 rule, popularised by Senator Elizabeth Warren in her book "All Your Worth: The Ultimate Lifetime Money Plan," is a straightforward budgeting framework that divides your after-tax income into three broad categories: needs, wants, and savings.

  1. 50% for needs: this portion of your income is allocated to essential expenses that are necessary for maintaining your lifestyle. This includes rent or mortgage payments, utilities, groceries, transport, insurance premiums, minimum debt payments, and other unavoidable bills.

  2. 30% for wants: this category is for discretionary spending or wants, including non-essential expenses that enhance your lifestyle but are not crucial for survival. Examples may include dining out, entertainment, travel, hobbies, fashion, and other luxuries.

  3. 20% on savings or debt: the final category focuses on securing your financial future, and should be allocated towards paying off debt beyond minimum payments or putting money into a savings account, investment, or pension fund.

How to apply the 50 30 20 rule

So, how do you put the 50 30 20 budget into action?

  1. Assess your income: begin by calculating your after-tax income. This is the amount you receive in your bank account after deductions such as tax, national insurance and pension contributions.

  2. Determine fixed expenses: identify your essential fixed expenses such as rent or mortgage, utilities, insurance, and debt payments. These are non-negotiable costs that recur regularly.

  3. Allocate 50% to needs: allocate half of your after-tax income towards covering your essential needs.

  4. Assign 30% to wants: With 30% of your income designated for discretionary spending, you have flexibility in how you use this portion. You can spend this money on the things that make you happy, but be mindful not to overspend and dip into your needs or savings categories.

  5. Allocate 20% to savings and debt repayment: finally, prioritise your financial stability and future security by allocating 20% of your income towards savings and debt repayment. This includes building an emergency fund, contributing to retirement accounts, and tackling outstanding debts.

How much of my salary should I save?

Adopting the 50/30/20 framework means that 20% of your wages will be put towards savings, providing that you don’t have debt to pay off. Other budgeting strategies advise that saving 15% of your income is a good rule of thumb. Either way, it’s good to get into the habit of saving some of your pay cheque every month, if you can.

Advantages of the 50 30 20 rule

Following this method can help you to save money from your salary every month. The 50 30 20 budgeting rule offers several benefits:

  • Simplicity: Its straightforward approach makes budgeting more accessible, especially for those new to managing their finances.

  • Flexibility: the rule allows for some flexibility in discretionary spending, while ensuring that essential needs and savings goals are prioritised.

  • Financial discipline: by allocating a fixed percentage of your income towards savings and debt repayment, you build disciplined financial habits that contribute to long-term stability.

  • Financial awareness: regularly following the 50/30/20 rule encourages greater awareness of your spending habits and financial priorities, empowering you to make informed decisions about your money.

Disadvantages of the 50 30 20 rule

While the 50 30 20 rule can be a useful way to manage your finances, it may not be suitable for everyone. Here are some potential disadvantages of the 50 30 20 rule:

  1. Some people might need more than 50% of their income for needs: some individuals or families may have higher essential expenses. With private home rents in the UK having increased to their highest point on record, and nursery fees in the UK being some of the highest in Europe, many are spending more than 50% of their wages on essentials, and don’t have much left over for discretionary spending or savings.

  2. You might need to save more than 20%: equally, if you’re trying to save for a house, saving 20% of your income might not be enough. Average new seller asking prices were up by +1.3% to £359,748 in the UK in February 2024, according to Rightmove, so you would have to save over £35,000 for a 10% deposit on the average house.

  3. Minimal focus on debt repayment: while the 50 30 20 rule allocates 20% of income towards savings and debt repayment, it may not prioritise debt repayment effectively for individuals with substantial debts.

  4. Risk of overspending: The 30% allocation for discretionary spending may lead to overspending if individuals lack discipline or fail to track their expenses effectively.

How to monitor your 50 30 20 budget

If you decide that the 50 30 20 rule is right for you, there are handy tools online that can help you to track your spending. Money Sprout’s 50 30 20 budget calculator works out how much you should be allocating to each category, making it easier to start working out your monthly budget.