50 30 20 rule - how it works

Budgeting is a bit like flossing: we all know we should be doing it, many of us try to turn it into a habit, but most of us put it in the back of our minds and forget about it. 

That’s because most of us don’t know where to start when it comes to budgeting. Do I need to print out my bank statements? Take out the old pen and paper? Become an Excel whizz? When it comes to managing our finances, it’s not as obvious as it may seem. 

And that’s where the 50 30 20 budget comes in: a handy rule of thumb to help aspiring budgeters determine how much to spend on what. Armed with the 50 30 20 rule, budgeting is suddenly a little easier to handle. 

What is the 50 30 20 rule?

The 50 30 20 budget was first invented by US senator Elizabeth Warren, which she designed to help families from all sorts of backgrounds take better control of their finances. It’s a budgeting system that is system agnostic: you can use a pen and paper, Excel spreadsheets and even the Money Dashboard app.

Put simply, the 50 30 20 rule uses percentages from your income to tell you where your money should be going every month. Here are what these different percentages cover:

50%: needs

Following this rule, 50% of your income should be allocated towards “needs”. These needs include rent, groceries, utilities and any other expenses you pay that you know you’ll need no matter what. Think of what you spend every month that is essential for you to live on and put them into your “needs” bucket.  

30%: wants

30% of your income should be allocated to expenses that you “want” rather than simply need. These could be holidays, eating out, certain hobbies, gym and other expenses that you could do without if your budget was tightened. 

20%: savings

The great thing about this budgeting method is that your saving habit is taken care of (finally!). This 20% is for your own personal financial goals. Depending on what stage you’re at, this could be for paying off debt, building an emergency fund, saving for a house and saving for retirement. This is your chance to set aside the money you know you’ll need in the future.  

How to create a 50 30 20 budget

Now that you understand the concept behind the 50 30 20 budget, you’ll see why it’s so easy to implement. Here’s a step by step process to create your budget:

  1. Calculate your total monthly income

Add up all your monthly income: this is the total number of pounds you receive every month in your bank account after tax. If your employer contributes to a retirement plan, find out how much they contribute and then add this to your take home pay. If you are self employed, you want to use the number you receive after tax and business expenses every month.

  1. Divide your spending into various categories

Now the fun starts! Multiply that number by the various percentages: 0.5 for needs, 0.3 for wants and 0.2 for savings. You’ll then get a different number for every category, which is essentially your budget for each one. 

Example: Benjamin and Laura are a couple who earn £3,000 after taxes every month. Following the 50 30 20 rule, this means they spend:

  • 50%: £1,500 on rent, utilities, bills, etc
  • 30%: £900 on fun stuff
  • 20%: £600 on savings (they’re saving for a house deposit)
  1. Compare to current spending

Now that you’ve got the numbers, how does your current spending compare to the budget you’ve just set up? No need to print out anything or even use a pen and paper, just check out your monthly transactions and put your expenses into the categories. 

With the Money Dashboard app, it’s just a matter of tagging the correct category to each expense. If you want to use your bank statement, just take out your phone’s calculator and add up all the expenses to the correct category. Then find out: are you spending too much on needs? Or too much on wants? Or not enough on savings? 

By comparing your current spending to your 50 30 20 budget you’ll be able to see what you need to cut out or add in. If your needs are more than 50%, you’ll understand why you always have that feeling of constantly being out of money. If your savings are 5%, you’ll understand why you never feel satisfied about your level of savings. Suddenly, everything starts to make sense...

Every month, Benjamin and Laura compare their current spending to their budget plan and see how far off they are. With practice, over time they learn to intuitively know when they’re overspending and need to cut back (or if they’re underspending!). 

Now you should try it yourself! Find out how much you earn every month after tax, and then do the calculations. Do those numbers seem realistic to you? How do they compare with your current spending? 

Benefits of the 50 30 20 rule

What are the different advantages of implementing the 50 30 20 rule? Here are some of them:

Good starting point

If you’re someone who has never budgeted before, it’s an activity that can seem either incredibly boring, useless or too complex. The 50 30 20 rule is therefore perfect: no need to do odd calculations or create a fancy graph. It’s a nice and easy way of telling you how much you should be spending on various things every month. If you’re saving 3% of your income, you know that something needs to change. Start with these percentages and you’ll be heading in the right direction. 

Forces you to differentiate between wants and needs

Maybe you’ve done a budget before but have struggled to stick to it because in your eyes, everything is essential. It happens to all of us, and there’s nothing inherently wrong with spending money on “wants”; it’s more about understanding your priorities. The 50 30 20 method forces you to actively think: wait, is this something I really need? It’ll encourage you to think twice before spending money in general.

Stops you from feeling guilty about spending

The main advantage of having a budget is that you now know where your money is going and what you’re allowed to spend it on. All too often we splurge on takeaway or clothes and then feel guilty because we know we should be saving instead. With a budget in place, you won’t feel guilty: this is money you have allocated for this purpose, and you therefore have a right to spend it on this item. 

You’ll feel more in control of your money, and you know what that means? You’ll also feel in control of your life. 

Why it doesn’t always work

Yes, there are some caveats to the 50 30 20 rule. As we’ve mentioned before, this method is only a rule of thumb and therefore only a rough guideline on what you should be spending your money on. Here are a few cases where the rule may not work as well:

You’re saving for a large expense

If you’re saving for a house deposit or any other large expense such as school fees, a gap year, or debt, you’ll want your savings rate to be as high as possible (if you’re super motivated, of course). You might find that 20% is too low, and that you’ll likely need to sacrifice some wants or needs in order to reach your goal faster.

You have little or no income

If you’re a student, retiree or earning a low income, the 50 30 20 rule won’t apply. That’s because your needs will likely be a much higher percentage of your income: if you’re earning £800 per month and spending £500 on rent and utilities, then your needs take up 62.5% of your income. In that case, you’ll need to adapt the rule and switch up the percentages. 

What’s great about this budgeting strategy is that you can adapt it to your situation: maybe 80% needs, 20% wants works better, or even the 70 20 10 budget: 70% on needs, 20% on debt and 10% on savings. Do some experimenting with the numbers and see what works best for you.

You can’t break down categories

Sadly, life expenses aren’t organised neatly into three separate buckets. Within each category you’ll have subcategories, with even more subcategories, and so on. The 50 30 20 budget won’t include all those subcategories, which means it can sometimes be difficult to tell how much you should be spending on shoes, for example. That’s why it’s important to keep track of your spending every month so you know if you really are overspending on shoes. 

Your categories keep shifting

Life happens, and spending habits change. You’ll see that your spending varies from month to month: your “want” budget may have to be a bit higher in December to buy everyone’s presents, and your “needs” will be higher if you’re dealing with a health issue. Life is not one straight monotonous line (thankfully!), and wants and needs keep changing. 

It can also be difficult to differentiate different items within groceries, for example: when is something considered an absolute necessity (tea and biscuits) while something else is just a want (a glow in the dark cake)?. That’s why it’s useful to experiment with the budget a little to see how it can fit you best. 

I’ve been experimenting with percentages for a while now. Personally, I like to split between rent, savings, and then all the rest. My current allocation is 35% on rent, 30% savings and then I can spend the rest on whatever I want (groceries, bills, etc). One of my new goals is to buy a stationary exercise bike, so I’m going to add another “category” named “exercise bike” which I will allocate 10% of my income to. Once I reach the total amount needed, I can go buy it. Depending on my goals, situation and events happening that month, these percentages are flexible..

If you’re reading this article, it’s likely that the 50 30 20 budget name caught your eye: could there be an easier way to budget? Hopefully, you’ve come away with a more intuitive, easy and straightforward way to manage your money. It’ll help you feel a bit more in control of your life, and you may even find out you like managing your budget. And next thing you know, you’ll turn it into a habit!

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