Maybe you’ve heard of the 50/30/20 rule, the ideal monthly budget breakdown designed by Elizabeth Warren – the prominent US senator and bankruptcy lawyer – and her daughter, Amelia Warren Tyagi.
In their 2005 book, All Your Worth: The Ultimate Lifetime Money Plan, they outline this budgeting percentage rule, to help people work out how much money they could spend – and how much they should put away in savings. So, what is the 50/30/20 rule? Let’s take a look.
What is the 50/30/20 rule?
The 50/30/20 rule is a simple budgeting guide that defines three paths that your money should take. 50% of your income should go towards those things that you need, 30% towards things that you want, and 20% towards savings or the repayment of debts. It’s as simple as that: 50, 30, 20.
The idea is that a budgeting percentage rule like this makes saving easier. It avoids the necessity of a penny-pinching detailed budget, and allows you to put savings aside immediately without sacrificing fun.
How to budget with 50/30/20
The beauty of the 50/30/20 rule lies in its simplicity. However, whilst the rule might be straightforward, the budgeting itself might not be.
Here’s how to put the theory into practice.
Start with your monthly income (Post-tax)
To get cracking with the 50/30/20 budgeting rule, it’s best to start with your monthly income after tax. How much money you actually have coming in should be the first thing you consider when thinking about how to budget.
You’ll find this on your payslip. Or, if you’re self-employed, you can calculate it by deducting tax owed and business expenses from your gross income.
Define what you need
Once you know your post-tax income, you’ll need to identify what constitutes your needs. For most people, these will be fairly standard: rent, bills, food, council tax, commuting expenses. You’ll need to decide whether a TV licence or a Netflix subscription really is a “need”. That’s up to you.
Ultimately, these needs should add up to roughly half of your income. Whilst people trying to live and save money in London might find that these needs exceed 50%, the idea is to keep these costs as close to half as possible. There’s no punishment if you don’t - just less to spend on your “wants”.
What can you change to make that possible? Swapping the train for your bike on the commute might save you that extra couple of quid. A packed lunch rather than a daily café trip will help too.
Identify your wants
The next 30% of your income is to go on “wants”. However, as nice as this might sound, there might not be much room for you to be too frivolous. Your “wants” make up everything that isn’t strictly necessary.
Here, think travelling, nights out, movies and entertainment, gym membership, coffees, gigs, and other leisurely activities. As a rough guideline, 30% would be about £550 per month for “wants” if you’re on a £27,000 salary, according to the government’s calculations.
By the way, Revolut’s Budget Planner can help you keep track of exactly where this money might go.
In cases where you have one-off expenses, which are going to go beyond the 30% limit, you can consider earned-wage-access solutions to fill the gap. Earned wages is the portion of the money you’ve already earned, but gets paid on payday. If you’re in the United Kingdom, our On-Demand Pay helps you to track and withdraw up to 50% of your earned wages, anytime you need. By payday, the withdrawn amount, along with a small flat fee (if applicable), will get automatically deducted from your paycheck. To set up On-Demand Pay, you’ll need your employer to know, so they can set it up via Revolut Business.
Save – or pay back those debts
The remaining 20% should go to build up your savings – or to pay back the debts that you had previously acquired. Some of this might go towards pension contributions, some might pay off your student loan, some might go into a pot for buying your first home.
What’s helpful is actually to put this 20% aside first on payday. Move it straight into your savings account, or you can set it aside into your Revolut Vault.
Are there other budgeting rules?
If the 50/30/20 rule doesn’t suit you, there are others to choose from which do just about the same job. You may have heard of some of these already...
What is the 50/20/30 rule?
The 50/20/30 rule happens to be identical to the 50/30/20 rule. Somewhere, over time, the numbers have been switched but the substance is the same: 50% for needs, 20% for savings, and 30% for wants.
And the 70/20/10 rule?
The 70/20/10 rule, however, does something slightly different. It tries to account for the fact that, for many, 50% of your income isn’t really enough to cover the necessities.
As such, 70/20/10 is rather a split between total living expenses (at 70%), savings (20%), and debts. This way, you can save time wondering whether a new pair of socks is a necessity or a luxury without sacrificing the rule’s simplicity. You still get to save 20% too.
The tip for your savings is still relevant. Move that 20% into your savings as soon as you get paid.
What is the 30% rule?
Although you may have heard of the 30% rule, it might feel like the hangover from an easier era. According to some, you should budget 30% of your income to cover all of your housing expenses.
Unfortunately, these days, according to the UK’s Office of National Statistics, renters in England currently spend 32% of their income just on rent – which doesn’t include all the rest, such as tax and bills, you might spend on your housing. So, you’d be doing very well if you can keep to the 30% rule at all.
We hope this blog post has answered your questions about the 50/30/20 budgeting rule. You might also want to check out some of our other blog posts on related topics:
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