The 50/30/20 is a simple budgeting technique that helps you start managing your money, keep doing what you enjoy and start building your future wealth.
Popularised by US Senator Elizabeth Warren and economist Amelia Warren Tyagi in their 2005 book, All Your Worth: The Ultimate Lifetime Money Plan. You split your income between paying your living expenses (50%), doing the things you like doing (30%), and working towards your financial goals (20%).
The rule gives you a clear structure to your budget for the month, with limits to help avoid overspending while building up your savings over time. Starting small with something achievable means you're much less likely to give up.
Before we begin it’s safe to say we're making the following assumptions about the financial position of the reader. We are looking at you, if you’re comfortable enough to have disposable income that sits idle in your current account or in a basic low return savings account with your bank every month. Understand the different types of savings accounts.
This is not financial advice - this is about simple tips to get going, while not impacting your day to day life or living a life of extreme frugality. So if this sounds like it’s for you, read on!
The following should not be taken as advice or guidance around financial hardship. If you're in this situation, there is support available from GOV.UK or Citizens Advice that can help.
First you need to know how much you’re spending on each area and your monthly income*. This will require a little work but all you need is a bank statement and a calculator.
Apps like Revolut and Monzo make this very simple as your spending is automatically put into categories like restaurants, shopping, groceries etc so you can work out the amounts of Essentials, desires and goals with ease.
Once you have all your spending laid out apply the following simple maths
Divide the amount you’re spending on Essentials, desires and goals per month by your monthly income.
For example: If your Essentials are £1100 and your wages are £2200 do the following
£1110 ÷ £2,200 = 0.5 then multiply that number by 100. For example: 0.5 × 100 = 50%.
*If your income isn’t regular take your average income from the last three months
The 50/30/20 rule works because it’s simple. It’s also flexible and you can change the numbers to suit your situation. For example high rent in a city might mean you have to split it 55/25/20.
These serve as limits and targets and can guide you to make changes. If your essentials cost more than 50% could you make a change like switching broadband provider? If your desires cost more than 30%, could you cut down the amount times you buy lunch out?
Putting 20% towards your financial goals is a good target but it can’t hurt to aim for more, if your living costs allow a 40/30/30 split, increase the amount you put towards them to reach them faster.
While 50/30/20 isn't a silver bullet, it does provide an easy-to-follow rule to get you started. The rest is up to you. Learn more about money saving tips.
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