Better budgeting with the 50/30/20 rule

Want a quick and easy method for budgeting? Then you can’t beat the 50/30/20 rule.

Elizabeth Warren, a U.S. Senator from Massachusetts, was named by Time magazine as one of the 100 Most Influential People in the World. She came up with the 50/30/20 rule.

After paying tax you split what you have left into the three different categories: essentials (needs: 50%), flexible spending (wants: 30%) and financial goals (plans: 20%).

Four steps

The first step is to work out your income. For most people that’s straight forward. If you’re self-employed you might need to guesstimate your earnings. HMRC have created a calculator to help you work out your tax bill.

Secondly allocate 50% of what’s left to living expenses. The essentials. Including housekeeping, rent, bills and transport. These are your ‘needs’. Absolute needs. Survival stuff. Even if you feel you need Netflix, a curry night or a holiday, these are not included in this category.

The third stage is to assign 30% of your money to ‘wants’. These are everything you buy, but don’t necessarily need. Basically all those little extras you spend money on that make life more enjoyable and entertaining.

Mixing the last two around is common. Spending half our money (or more) having fun and finding 30% isn’t enough for our essentials (needs). Consequently there’s nothing left for financial goals.

So the fourth stage is to put 20p from every £1 aside to help you meet financial goals. Too often that means paying back loans. You should be paying this into your savings account and pension

Putting into practice

Let’s say your monthly income is £1,000. Using the 50-30-20 rule, you can spend no more than £500 on monthly needs. That means if your housekeeping bill is £350, you’ve only got £150 left for bills and transport.

This leaves £300 a month for your ‘wants’. That’s your going out budget. And all the things you go shopping for but aren’t required to meet your basic needs. You might consider shifting some of this money back to meet your ‘needs’ if you’re coming up short there.

Now you have £200 left, that last £20 in every £100. You know what to do with it. Pay down on debt, save for an emergency. Plan for your future.

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