Learn how to apply the 50-30-20 budgeting rule

Discover what the 50-30-20 rule is, how it works and why it has worked for so many people.

If you struggle with managing your money, but find traditional budgeting apps or techniques too complicated or time-consuming, the 50-30-20 rule could work for you.

This is perhaps the simplest budgeting strategy, but this simplicity is what has made it so effective for so many people.

What is the 50-30-20 rule?

With the 50-30-20 rule, you split your after-tax income into three categories:

  • Needs (50%). The essentials: Rent or mortgage, bills, travel, insurances, basic groceries.
  • Wants (30%). The non-essentials: Socialising, eating out, entertainment, clothes.
  • Savings (20%). Your rainy day fund: Savings account, investments, pension etc.

If you have debt, you should use your savings fund to pay that off.

Where does it come from?

The 50-30-20 rule is believed to have originated from Elizabeth Warren and Amelia Warren Tyagi’s book, “All Your Worth: The Ultimate Lifetime Money Plan”.

However, this strategy has proven to be so effective that it has been mentioned within several personal finance books and blogs since.

How does it work?

You calculate your monthly after-tax income (do this every month if you need to). Then, multiply this amount by 0.5 (needs), 0.3 (wants) and 0.2 (savings).

These are your monthly budgets for each of the three categories. It’s up to you to make these totals work for your life.

A lot of people have used their desire to stick to the 50-30-20 rule to reduce their living expenses (perhaps by switching bill providers, wasting less food or cycling to work). Others have used it as motivation to cut back on frivolous shopping sprees.

Of course, there is no-one waiting to stop you breaking this rule, so you’ll need discipline in order to keep to it.

How to apply the 50-30-20 rule successfully

Here are some tips to help ensure you successfully apply the 50-30-20 rule in your life every month.

  • Set up a standing order to transfer your savings as soon as you get paid. That way, you’re less likely to miss the money, because you never had it. It becomes less tempting to spend it when it’s sitting in a different account. Depending on your choice of savings vehicle, it could be impossible to withdraw or spend it.
  • Calculate your “needs” budget. If it’s not 50% of your income, explore ways to reduce it, such as buying cheaper groceries or switching utility providers.
  • Open a second current account. Have one account for “needs” and the other for “wants”. That way, you’ll find it far easier to track each of your budgets.
  • Wait a couple of days before you spend your “wants” budget. This gives you enough time to figure out if you really need the item. It’ll stop you falling victim to emotional impulse buying.
  • Split your annual bills. If you have annual bills, put away 1/12 of it every month, so it doesn’t derail your budget when it finally comes around.
  • Track your savings growth. When you watch your savings grow bigger and bigger, this can fill you with enough pride and excitement to motivate you to stick with the 50-30-20 rule.
  • Have a savings goal. If you know what you’re going to spend your savings on and how long it will take until you can afford it, this is likely to motivate you even further.
  • Use your savings for surprise expenses. Surprise expenses happen to all of us, so don’t feel too downbeat if one harms your progress. Instead, be grateful that you have savings to pay them off immediately, rather than having to take out an expensive loan. Thanks to the 50-30-20 rule, you won’t be anywhere near as stressed by surprise expenses as you used to be.

The bottom line

Yes, there are more complex savings strategies which may work better. But if you’re not saving money at all, the 50-30-20 rule is a good place to start. The simplicity and low maintenance of this strategy is unlikely to intimidate you, meaning you’re more likely to begin saving and stick at it.

Before you know it, you could have saved enough money to buy the things you really want in life.

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