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The 50-30-20 rule: how to make it work for you

The 50-30-20 rule: how to make it work for you
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Looking for a simple way to budget money? The 50-30-20 rule could be for you. Here’s how it works and some tips for how to budget your own personal finances this way. 

What is the 50-30-20 rule?

Popularised by Senator Elizabeth Warren, the 50-30-20 rule (sometimes written as 50/30/20) can help you track your spending habits. It’s fairly simple to learn, and it can help you identify ways to save money. 

According to the 50-30-20 rule, we should spend:

  • 50% of our post-tax income on essentials (e.g. bills, food, living expenses).
  • 30% on leisure (e.g. dining out, gym memberships, holidays). 
  • 20% on debt or savings (e.g. paying more than your monthly credit card repayment or saving money in an ISA).

What’s the reasoning behind the 50-30-20 rule? Well, according to Senator Warren, most of us:

  • Spend too much;
  • Don’t save enough; and
  • Have no real sense of where our money’s going. 

By following a set rule to divide our money each month, it could be easier to track our spending and save money for the things we really need. 

How do I use the 50-30-20 budget rule?

It’s easy to get started. 

Calculate your monthly income 

First, work out how much money you earn per month after tax.

  • If you’re employed, this is probably your salary. 
  • If you’re self-employed or your wage varies from month to month, calculate a three-month average. 

As an example, say you clear £2,000 per month after all deductions. This is your monthly income for budgeting purposes.

Identify your budget

Next, work out how much you spend each month. 

  • Make a note of all your direct debits (e.g. rent, utility bills).
  • Check your bank statements and identify how much you spend on essentials like groceries and petrol.
  • Work out what you’re spending, on average, for leisure activities. 
  • If you ever save money, make a note of how much you save on average. 
  • Finally, note down what you spend on debt repayments.

So, here’s an example: 

  • You earn £2,000 a month after deductions.
  • From this, you put £40 per month into a savings account
  • You spend £1,000 on essentials. 
  • The rest (£960) goes on luxuries. 

Track your spending

Now you know what you’re spending, try reallocating your money according to the 50-30-20 rule. So, sticking with our above example, you would now spend:

  • 50% on essentials: £1,000 per month 
  • 30% on leisure: £600 a month
  • 20% on debt or savings: £400 per month 

By tracking your spending this way, you are:

  • Saving more money each month;
  • Paying more towards your outstanding debts; and
  • Covering all of your essential needs, with plenty of leisure money to spare. 

To be clear, you don’t need to be precise. For example, if you decide to spend 25% on paying down debt and only 25% on leisure activities that month rather than 30%, that’s fine! What matters is that you understand where your money’s going, and you’re tracking how you spend it. 

Is the 50-30-20 rule right for me?

As with anything money-related, it depends. 

  • On the plus side, it’s a simple way to track spending if you have no experiencing with budgeting. It’s quick to work out where your money’s going and you can easily make some changes to meet your goals.
  • On the other hand, it doesn’t really teach you how to improve your spending habits. And, depending on your personal finances, the percentages might not work for you. For example, maybe 50% doesn’t cover all of your essentials, or maybe you want to spend more than 20% on savings.

It all comes down to your individual goals – what works for some doesn’t work for everyone.

Takeaway

The 50-30-20 rule is an easy way to start taking back control of your finances. However, it might not be the best way for you to budget your money, especially if you have a larger income or bigger outlays. You can always give it a go, though, and see if it works for you. 

Finally, if you’re worried about your spending habits or you’re struggling to pay down debt, always seek financial advice rather than trying to deal with it alone.

Could you be rewarded for your everyday spending?

Rewards credit cards include schemes that reward you simply for using your credit card. When you spend money on a rewards card you could earn loyalty points, in-store vouchers airmiles, and more. The Motley Fool makes it easy for you to find a card that matches your spending habits so you can get the most value from your rewards.

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