50 30 20 Rule | The Budgeting Plan that Works

July 8, 2022
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50 30 20 Rule | The Budgeting Plan that Works

The UK is the fifth-largest economy globally, but its debt continues to rise. During the pandemic, over 9 million people borrowed money. As such, the average total debt per household is now £63,112. By 2025, it’s estimated that household debt will rise to £2 trillion.

The good news is people can take steps today to reduce the rising debt. How you may ask. By creating a budget. There are numerous budgeting methods, but if you choose the right strategy for your needs and stick to it, you can take control of your finances. Not only will you save money and build an emergency fund. But you’ll pay down debt.

Looking for a simple budgeting method that meets your needs? Read on to learn more about the 50 30 20 rule.

What Is the 50 30 20 Rule?

The 50 30 20 rule is a popular and robust budgeting strategy that helps people to reach their financial goals. Popularised in the 90s by Elizabeth Warren in her book “All Your Worth: The Ultimate Money Plan,” this method divides your after-tax income into three buckets.

Basically, the strategy organises your income into three buckets namely needs, wants, and savings. To meet your financial goals, the strategy requires you to allocate 50% of your after-tax income to needs, 30% to wants, and 20% to savings.

Many people are bad at tracking their expenses, saving money, and building an emergency fund. With this rule, you can now manage your after-tax income by prioritising your income to cover your needs, and wants. So, in case of job loss, or unforeseen monetary costs, then you can use the savings or emergency funds to offset costs.

Since the 50 30 20 rule is still in play, you will replenish the money taken from the emergency fund to pay off the unforeseen costs.

How Does 50 30 20 Rule Work?

Elizabeth Warren recommends that you divide your after-tax income into three buckets – needs, wants, and savings. Basically, you should allocate 50% of your after-tax income to your needs. Needs are the things necessary for survival. They include rent, health care, insurance, and utilities.

If you’re spending more than half of your income on your needs, the 50 30 20 rule can help you to downsize your lifestyle. For instance, you can choose to downgrade to a smaller home, use public transportation and cook at home more often

Thirty percent of your income should cover those things that are not absolutely essential. We’re talking about new clothes, dinner, sporting events, etc.

What you ought to know is that anything in the wants bucket is optional. For example, instead of eating out, you can cook at home, or instead of getting tickets to the game, you can watch the game on TV.

Finally, allocate 20% of your after-tax income to investments and savings. You can build an emergency fund, save for retirement, or invest in stocks, precious metals, and other assets. Savings can also go towards debt payments. The extra payments will reduce the principal and interest owed.

How to Set up the 50 30 20 Rule?

The first thing to do is to determine your take-home income. This is the after-tax income. Now that you’ve determined your after-tax income, divide the amount into three buckets – 50%, 30%, and 20%.

Do this by multiplying your take-home income by 50%, 30%, and 20%. You can write down the monetary amount for each percentage or prepare a spreadsheet and record these amounts.

Next, determine your needs, wants, and savings. The following are examples of fixed expenses or needs that you’ve to pay every month.

Rent
Mortgage payment
Car payments
Transportation
Utilities (water, power, gas, internet)
Insurance
Groceries
Phone bill and others.

The following are examples of wants or flexible spending that you’ll allocate 30% of your monthly income.

Vacations
Dining out
Hobbies
Gym membership
Shopping (clothes, shoes, handbags, hats, etc)
Entertainment

Lastly, we have savings and debt repayment. They include:

Retirement savings
Emergency fund
Paying off debts
Savings to buy a home

Next, create your 50 30 20 budgeting spreadsheet template on Microsoft Excel or Google Sheets. You can list your needs, wants and savings on the left side of the spreadsheet and the months of the year at the top of the spreadsheet. All that’s left to do is for you to update your 50 30 20 budget and keep track of your expenses.

Here is a simple example. Let’s assume your after-tax income is £1,000. Following the 50 30 20 rule, 50% of your income – £500 – should go towards your needs, and 30% or £300 should go towards your wants. Lastly, allocate 20% or £200 to your savings and debt repayment. It’s that simple.

Why You Should Use the 50 30 20 Rule

The 50 30 20 rule can safeguard you and your family against hardships. Common hardships you may face include job loss, declining health, and many others. Without a budget, you will not allocate money to your emergency funds and savings. As such, you won’t have money to cover your needs and wants after a job loss or when you fall ill.

However, by using the 50 30 20 rule, not only will you’ve money to build an emergency fund. But you’ll also have money for your retirement savings and investments such as stocks and precious metals.

The 50/3020 rule also gives you a glimpse of your financial status. Planning on moving to a bigger home, buying another car, or taking a holiday? Keeping track of your finances using the 50/30/20 rule gives you a better idea if you can afford a new home, vacation, or car.

Is the 50 30 20 Rule Right for You?

The beauty of the 50 30 20 rule is that it’s customisable to your needs and wants. Basically, you can adapt the percentages to work for you. For example, if you’ve a high-paying job, you can allocate 40% to your needs, 20% to your wants, and 40% to your savings.

There are several options you can explore to reduce the costs of your needs. For example, you can move to a smaller house and pay less rent or shop around for competitive deals on utilities and the internet.

So, is the 50 30 20 rule right for you? Yes, this budgeting strategy is right for you. Not only can the strategy help you keep track of your spending and safeguard your financial future. But you will get to save for retirement while at the same time doing everything that makes you happy.