Is the 50/30/20 budget rule the right budgeting method for you? How can you decide which budget method to use? Here’s what you need to know about the 50/30/20 rule and some of the pros and cons.
The 50/30/20 rule explained
According to the 50/30/20 budget rule, you should spend 50% of your take-home pay on needs, 30% on wants and 20% on savings and investments.
‘Needs’ includes essentials like your rent, bills and food. ‘Wants’ includes things you have a choice to spend your money on, like clothes and hobbies. ‘Savings and investments’ includes paying off debt, building up cash savings and investing for retirement.
4 pros of following the 50/30/20 budget rule
1. The 50/30/20 rule is simple. You can sit down and quickly work out what you are spending on each category. You can also see whether you’re spending too much in one area and not enough in others. For example, if you are spending more than 30% on wants, it might be the push you need to look at ways to cut costs and boost your savings and investments.
2. It puts savings first. Saving 20% of your take-home pay may sound like a lot, but if you want to build wealth, then it’s no good spending all your money! Using the 50/30/20 rule to put savings first helps you save more money towards future plans including retirement.
3. The 50/30/20 rule frees up money for the fun stuff. You don’t need to feel guilty about buying another dress or eating out with friends as long as you don’t spend more than 30% of your earnings on wants.
4. It can give you a sense of achievement. It’s an amazing feeling to be in control of your money and to see your savings building up with the 50/30/20 rule.
4 cons of following the 50/30/20 budget rule
1. Using the 50/30/20 rule may not be possible for everyone. Some people may need to spend more than 50% on essentials. A family living on a single income, for example, may really struggle to keep their spending to 80% of their income. They may still want to budget carefully, but decide to save less than 20% at the moment.
2. It may not be right for you if you need to save more. For example, someone in their 50s who doesn’t have savings may need to save more than 20% of their income to build up a pension quickly. They might be at a stage of life where they have paid off their mortgage and decide to spend less on essentials, but more on saving.
3. It can be hard for people with variable incomes. Self-employed people may need to put money aside to cover quieter periods. They might sometimes need to save more than 20% and then dip into their savings at other times.
4. The 50/30/20 rule doesn’t mention ice creams! I mean, is an ice cream a want or a need? It’s food, but not completely essential if we’re being honest! The point is that it’s not always simple to split spending between wants and needs.
It’s your money
It’s your money and only you can decide whether the 50/30/20 budget rule is right for you. You may want to use it but adjust the percentages slightly to meet your needs. You may want to look at other budgeting methods before you decide which to use. Budgeting tools, zero-based budgeting and the cash envelope system are all popular methods.
Ultimately, it’s your budget and your decision. Just remember to leave room in your budget for ice creams!
Some offers on The Motley Fool UK site are from our partners — it’s how we make money and keep this site going. But does that impact our ratings? Nope. Our commitment is to you. If a product isn’t any good, our rating will reflect that, or we won’t list it at all. Also, while we aim to feature the best products available, we do not review every product on the market. Learn more here. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Barclays, Hargreaves Lansdown, HSBC Holdings, Lloyds Banking Group, Mastercard, and Tesco.