If you are looking for a budgeting and savings strategy that works for you, then look no further. The 50/30/20 rule is the budgeting rule that will help you budget better.
Championed by Senator Elizabeth Warren, the 50/30/20 rule is a good example of how budgeting needn’t be a minefield of spreadsheets and figures. In fact, it can be simple, clear, and effective.
How it works
The universal appeal of the 50/30/20 rule is its simplicity. If you want to know how much of your salary you should save, or what percentage of your income should go on housing or food costs, then the 50/30/20 rule will help you.
It divides all your outgoings into three simple categories.
50% on Needs
50% of your salary should be spent on essentials like rent, bills, transportation, and food. These are things that you cannot live without. They are essentials.
30% on Wants
30% should be spent on leisure activities and hobbies, such as gym memberships, holidays, or buying take out on a Friday when you’re totally frazzled. All of these are things that you want but don't need to survive.
20% on Savings
The final 20% of your salary should go into your savings, or to pay off any outstanding debts you have, such as credit cards or student loans.
And it really is as simple as that!
How to start
As with anything – you can’t build castles out of thin air. If you are going to implement a budgeting technique you need to know exactly how much money you have coming in first, and where it's coming from.
This can be tricky if you have a variable income, or get paid at different points throughout the month. A simple way of managing this is to simply apply the 50/30/20 rule to each paycheque that you receive and divide the money as you earn it, rather than looking at all your money as a whole.
You can’t decide half way through the month that your daily coffee needs to move from ‘wants’ to ‘needs’, or vice versa. You need to be clear on which category each cost belongs to and keep it there.
Deciding how to classify different costs may take a few months to finalise initially, but each time you define something make sure to note it down so that you can keep track of it for future months and you reduce confusion going forwards.
If you aren’t a fan of lists or hand written inefficiency, then using a money app can be a great alternative.
Automatic classification of each spend on into useful categories like ‘food and beverages’, ‘transportation’, or ‘self-improvement’, can significantly streamline the initial categorisation process and increase the efficiency of your budget. It also stops minor transactions slipping through the net, as all money is digitally accounted for.
A good money app will also provide an aggregate of your spending data across an entire month and display it in a compact and user-friendly format. It gives you a clearer overall idea of where your money is being spent.
Tailor your budget
The most important thing about any budget is that it makes sense to you. Whilst the 50/30/20 rule is a great way to start budgeting, saving, and paying off your debts in a manageable way, it is certainly not a one-size-fits-all situation.
If you live in a particularly expensive city, such as London, then it is highly likely that you will be paying far more than just 50% on your housing, transport, utilities, and food costs; such is life. It may be that you need to juggle your weightings slightly to take this into account. For example, you may decide that for you, a weighting of 60/20/20 works better.
The most important thing to keep in mind is to try not to reduce the savings category to under 20%.
Oval does not provide financial advice. If you need further information we suggest you look for expert advice.