Topic: Personal finance October 23, 2019
Author: Neil Cubley

How to budget using the 50-30-20 rule

Bank of Ireland Financial Wellbeing2 MIN READ

The 50-30-20 spending rule is a way of organising your money.

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.

1 How the 50-30-20 rule works

The rule works by setting guidelines for how much of your income you spend on the essentials, how much you spend on your ‘wants’ and how much you save for the future.

They are just guidelines.

At some times during our lives, for example, the cost of the essentials might leave very little for our ‘wants’ (never mind our savings).

At other times, we might be saving every penny and reducing our ‘wants’ to very little.

But the 50-30-20 rule is a good guide to keep in mind to manage your money.

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2 ‘The Essentials’:
50% of your income goes on Needs

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.

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‘The Good Stuff’: 30% of your income goes on Wants

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.

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4 ‘The Future’: 20%
of your income goes on Savings

20% of your take-home income should go on savings.

When we overspend on the good stuff it’s often our savings that pay for it.

Savings means all forms of putting away money to pay for future needs.

That includes saving for holidays, building a ‘rainy day’ fund and contributions to retirement funds.

If you have an occupational pension, your employer will automatically deduct your pension contributions from your salary before tax 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.

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5 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.
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6 Overspending on the Essentials?

Needs greater than 50%?

Can you reduce your spending on Wants or increase your income until you can get your Essentials back down to 50%?

7 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.

8 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

Take two minutes to check your financial health and learn how to improve it with the Bank of Ireland financial healthcheck.

All efforts were made to ensure that the information in this article was accurate at the time of original publication. The content of this article do not constitute financial advice.

Bank of Ireland is regulated by the Central Bank of Ireland.

Topic: Personal finance October 23, 2019
Author: Neil Cubley
Tags: Budget tips

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