How to budget using the 50-30-20 rule
2 MIN READ
The 50-30-20 spending rule is a way of organising your budget.
It may help you to strike a balance between keeping your living costs in check, enjoying life and saving for the future.
The 50-30-20 rule was created by US Senator Elizabeth Warren to help families take control of their household finances.
How the 50-30-20 rule works
1. Work out your monthly or weekly income, after tax
2. Use 50% for essentials such as rent or mortgage, energy, food, transport etc.
3. Spend 30% on wants like holidays, entertainment, fashion, meals out etc.
4. Try to save 20% into a savings account or by making pension contributions
5. If you overspend in one area, return to the 50-30-20 rule as soon as you can
50% Needs – ‘The Essentials’
The largest percentage of your spending should go on your household needs.
Things like your mortgage or rent, gas, oil and electricity, food and groceries, refuse and recycling, transport, broadband, medicines and insurance.
Not included in the essentials are things like TV subscriptions, nights out, takeaways or fashion items like the latest clothes or accessories.
30% Wants: ‘The Good Stuff’
The 50-30-20 rule doesn’t mean that you have to stop spending on life’s little luxuries, it just sets a 30% guideline for how much you spend on them.
The good things in life aren’t essential but we can’t survive by living just on the essentials for very long.
So it’s best to acknowledge that we are human while setting a limit.
30% goes on things you enjoy such as meals out, concert tickets, movies, sport, and buying fashion clothes and accessories.
It also goes on the more expensive goodies like holidays and technology (although you might want to save up to pay for these).
And the little things that add up like takeaway coffees and juices.
Typically, we tend to overspend on the good stuff.
20% Savings: ‘The Future’
20% of your take-home income should go on savings.
When we overspend on the good stuff it’s often savings that pay for it.
Savings means all forms of putting away money to pay for future needs.
If you have an occupational pension, your employer will automatically deduct your pension contributions from your salary so remember to add them into your 20% of Savings.
Paying more than the minimum repayment amount on a credit card or loan is also a form of saving so add that in as well.
Applying the 50-30-20 rule
The best way to see the 50-30-20 budget planning in action is to take an example.
Let’s say your income is €2,400 a month after tax is paid. According to the 50-30-20 rule, you should try to spend:
- €1,200 or 50% on Needs
- €720 or 30% on your Wants.
- And €480 or 20% on Savings.
Overspending on Needs?
Needs greater than 50%?
Can you reduce your spending on Wants or increase your income until you can get your Needs back down to 50%?
High on Wants?
Spending more than 30% on Wants?
You have great potential to get your spending down to 30% and to increase your Savings so start reducing spending.
Low on Savings?
The future may bring extra costs so it’s best to be prepared for the obvious short-term ones like Christmas and birthdays as well as the longer-term ones like retirement or your children’s education.
Find out more
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