Once you have made the decision to start managing your money better, it can be tough to know where to start, and how to allocate your money to different areas of spending. How much is enough to save? How much is too much to spend on fun?
Before you drill down into exactly what you want to spend your money on each month, it can be helpful to use the 50 30 20 rule to get an overall view of where to spend your money.
It’s a simple rule that anyone can follow, to help gain better control of their finances in an easy and uncomplicated way.
What is the 50 30 20 rule?
The 50 30 20 rule is a rule of budgeting that was invented by Senator Elizabeth Warren in her book, All Your Worth: The Ultimate Lifetime Money Plan. It is hailed as a simple way to reach your financial goals.
The rule suggests that you should spend 50% of your post-tax income on necessities, 30% on wants, and 20% on savings.
50% necessities
The 50% of your take home pay that you spend on necessities should be the spending in your life that is unavoidable. For example, your rent/mortgage payments, bills, food and transport.
This also can include things like insurance policies, minimum debt repayments and expenses for any children that you may have.
If you find that you are spending more than 50% of your income on necessities, it is quite possible that you will be able to find areas of expenditure that you could cut down. For example, could you switch utilities suppliers to get a lower rate? Could you meal plan and batch cook to bring down your food bill? Perhaps you could even move to a lower-cost area if you really need to save in this area.
30% wants
According to the rule, 30% of your income should be spent on wants- i.e. non-essentials. So this might be things like a manicure, drinks with friends, or that new pair of shoes.
A want is anything that is not a basic need or requirement to survive in the world and go about your daily life.
It can be all too easy to spend more than 30% of your income on ‘wants.’ Lots of people can fall down in this area and struggle to make their budget work for them. The answer is easy if you are spending more than 30% of your income in this area- cut back.
Consider which ‘wants’ are the things that you really, really, want and which ones you could let go or reduce. For example, if you love travelling and luxury holidays- could you find some better deals and travel hack your way to cheaper flights?
If you love shopping, perhaps you could switch ASOS for charity shopping? You’ll find some gems with my guide to the best charity shops in west London.
And if you can’t live without your greatest wants? Why not make some extra money on the side? Take the Thrifty Londoner 7 Day Money Making Course to find your side hustle and start making some extra money to supplement your lifestyle.
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20% savings
The final 20% of your take-home salary should be put aside for savings and investments. That could be anything from saving for a holiday, a home, or retirement.
If you are in the position to do so, and it suits your attitudes towards money, you may also want to consider investing. Read my guide on how to start investing to get an idea of whether investing could be a good option for you and your money.
Of course, if you want to reach a savings goal quickly, you might decide to save more than 20% of your take home salary. This is completely doable and you could reduce the amount you spend on needs and/or wants to make this a reality.
You might also be interested in reading: What Is An Emergency Fund and How Can I Save One?
How can you implement the 50 30 20 rule?
A relatively easy way to implement the 50 30 20 rule is to use some of the best money saving apps available to you to help split out your budget and track your spending.
Monzo is a brilliant app-based tool. You can create a monthly budget, and divide this into the areas that you would like to spend your money.
Monzo could really aid you in implementing the 50 30 20- you can categorise all of your spending into ‘needs’ and ‘wants’ and then also set up a saving pot for that last 20% of your monthly income.
The app does allow you to further categorise your spending into shopping, food and drink, entertainment, personal care etc. However, you could bypass all of this and just simply set up two categories- needs and wants.
Every time you spend money you can allocate the purchase to the relevant category and easily track your money throughout the month. Monzo will show you the amount that you have left to spend for the month, and even alert you when your funds are running low.
Monzo is completely free to use which means that it’s the perfect accompaniment to your budget plan. Sign up using my link to get a free £5 to get you started.
An example of using the 50 30 20 rule
Let’s say that your take home pay at the end of the month is £2,500. That means that your necessities should in theory cost no more than £1,250 per month. If you’re living in London, your rent and utility bills probably come to at least £700, leaving you with £550 for groceries, transport and other bills. That’s pretty tight!
If you’re a Londoner, you might consider allocating a larger percentage of your salary to your ‘needs’ due to the high cost of living.
That leaves you with £750 for ‘wants,’ and all the fun things in life. And finally, £500 for savings and investments.
If you have no dependents, you might consider £750 for ‘wants’ each month to be excessive- in which case you might want to tweak these percentages slightly and put a larger percentage towards your ‘needs’ or your savings.
You might also be interested in reading: Zero Based Budgeting- How Could it Help you?
Why does the 50 30 20 rule work?
The 50 30 20 rule works because of its simplicity. By following this rule, most people can ensure that they are covered in every area of their life.
It removes some of the complication surrounding a detailed budget- if you find managing your money overwhelming, this could be a great way of introducing a budget into your life.
There are no over-complicated category breakdowns, and the method is super easy to track because as soon as you get paid, you can split the money into separate accounts or money pots and spend the money freely on these categories.
As with every budgeting method, you will still need to keep track of your spending to ensure that you have sufficient funds to last through the month, but it avoids the need to write down or track each and every expense and the category that it might fall into.
