The 50-30-20 Budget rule – a useful budgeting tool

What is the 50-30-20 budget rule?

The 50-30-20 rule is a simple yet effective approach to budgeting.

It can help you keep your spending in check by making you allocate your monthly income into three spending categories.

These categories and the percentage allocation to aim for is:

• needs (50%)
• wants (30%)
• savings or clearing debt (20%)

Let’s go through each of these spending categories in turn.

50% of your income on needs

Needs are essential living expenses – things you can’t live without.

This can include:

• rent/mortgage payments
• utility bills
• basic groceries
• work travel costs (i.e. train and bus tickets)

30% of your income on wants

Wants are non-essential living expenses – things you could live without if you had to.

This can include:

• eating out
• holidays
• gym membership
• video and music streaming subscriptions

If you are unsure if something is a need or want, ask yourself “Could I live without this?” If yes, it’s likely a want.

20% of your income on savings or debt

This can include:

• paying off any outstanding debts
• saving some money for a rainy day
• pension contributions

Just so you’re aware, minimum repayments towards clearing debt is categorised as needs. But payments above the minimum repayment amount should be allocated to the savings category. This is because these extra repayments reduce existing debt and accrued interest.

How to use the rule

Step 1

Look over your bank statements and receipts and categorise transactions from the last month. Each transaction should be categorised as either ‘needs’, ‘wants’ or ‘savings’.

Step 2

Calculate your take-home monthly income. If your income changes month to month, use the average over the last three months.

Step 3

Then work out the percentage you are spending in each category.

For example, if your monthly income is £1600 and the ‘needs’ category adds up to £850, then the calculation is: £850 ÷ £1600 = 0.53.

Then multiply this by 100 to get the percentage value. Continuing with the example above, this is 0.53 × 100 = 53%.

Repeat the above calculation for the other two categories, ‘wants’ and ‘savings’.

Analysing the results

With all the percentage values calculated, compare them to each other.

If following the 50-30-20 rule perfectly, the spend per category could be visualised as the pie chart below:

Looking at your calculations, is there a category that is significantly over the 50-30-20 allocation?

For example, if you discover you are spending over 50% of your monthly income on ‘wants’, this might be an area to make some spending adjustments to.

Small changes add up over time, such as putting more of your income into savings and reducing your spending on the ‘wants’ category.

This can help you build healthy spending habits.

Should my spending fit the 50-30-20 rule exactly?

Everyone’s financial situation is different, so it’s okay not to match the 50-30-20 rule perfectly.

In fact, one key aim of using this rule is that it helps you become more aware about your monthly outgoings. It makes it easier to identify areas that you’re needlessly overspending on and helps you start budgeting better.