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What is the 50 20 30 financial rule?

author: Sarah Beresford

By Sarah Beresford

Savings ideas work better when they are simple. Use this easy rule to help you divide up your income and stay on top of your budget.

The 50 20 30 rule is a popular budgeting strategy that you apply to your income. 

Using this rule, you split your after-tax income and allocate:

50% on needs

Your needs include things like rent, bills and food shopping. All the things that you can't live without.

20% on savings

You should allocate 20% of your income into your savings pot. You should use this category for any debts or repayments as well.

30% on wants

Wants covers all your personal spending. So, things like online shopping, streaming subscriptions and takeaway coffee all fall into this bucket.

Why does it work?

The best part of this rule is that it doesn't involve complicated calculations or tedious spreadsheets. You divide up your income based on the percentages.  

Another reason it works is, is because it can be flexible and fit most people's income. This means you can alter the percentages to fit your goals. For example, if you've got a lot of debts to pay off, then you could increase your savings from 20% to 30% and reduce your 'wants' to match.

The pros

The main advantage of this rule is that it’s easy to understand and execute. By keeping things simple, you’re more likely to stick to it.

Allocating a portion of your income to things you want gives you a certain amount of freedom with your income whilst still being able to afford your essentials.

It’s also flexible, so you can adjust the percentages up or down to suit.

The best part about the strategy is that it's simple, so you’re more likely to stick to it long term as well.

The cons

One drawback of the rule is that if your income is low, you might have to allocate more than 50% of your income to needs. It also might be difficult for some people to save 20% each month.

On the other hand, people who have a higher income may be encouraged to spend more than they usually would, if they allocate 30% on wants.

The rule also doesn’t explain what to do with any money you have left, so there's a slight grey area here. 

Also, if you’re focusing on a savings goal, then 20% might not be enough to help you get there, so you’d have to adjust.

How to use it

Firstly, work out your monthly income. If you have a partner, you could combine your income and split your budget between you.

Multiply your take-home pay by 0.50/0.20/0.30

If your monthly income is £2000, that would mean:

  • £1000 is for needs
  • £400 is for savings
  • £600 is for wants.

When you've got your income worked out, you'll need to track it to stay within your goal.

Are there any alternatives?

Because this rule is so flexible, you can adjust the percentages to suit your needs best. Some people find that splitting their income 60/20/20 works well for them. Or even 70/20/10.

Another option would be to follow the 80/20 rule. It’s a similar idea, but instead, you combine your wants and savings. So you'd put 20% into savings, and then you decide what to do with the rest.

Consider how you split your income based on your personal situation.  If you've got quite a lot of fixed payments every month, then allocating more towards your needs would be better. Or if you've got a savings goal in mind, then you could bump up that percentage instead.

Find out more about saving if you’re on a low income.

Disclaimer: All information and links are correct at the time of publishing.

author: Sarah Beresford

By Sarah Beresford

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