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There is beauty in simplicity
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.
A quick note before you start…
Think about what’s right for you
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 interest 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.
What could 50/30/20 look like?
Bring order to the chaos
Essentials - This is stuff you need - Your costs of living. This is your rent or mortgage, the bills you pay from utilities like energy to your mobile phone, internet. This includes food essentials, transport to work and insurance policies. You can also add debt here depending on how you see it or you may choose to see it as a financial goal - It’s up to you. In general it's considered wise to pay off short term debt first if it costs you interest.
Desires - This is stuff you want and like doing. Activities like going to restaurants, cinema, shopping, holidays and trips, your gym membership and the subscription services you use like Netflix. We also mean non-essential food like takeout coffee.
Future - This is savings and/or investments that are put towards your goals. How you do it is up to you to save up for a house deposit or pay off long term debt repayment or even setting up an emergency fund. This is where Chip comes in, but more on that later.
How to apply the rule
Working out your monthly spend
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 £1,100 and your wages are £2,200 do the following
£1,110 ÷ £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
What else is great about 50/30/20?
It’s completely flexible
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 your goals.