The 50 30 20 Rule, and Why You Should Be Using It

Personal finance

Personal finance is a sticky subject for UK adults, with employment woes and a rising cost of living making it harder and harder to justify judicious changes to finances. However, the employment of a single system could make it drastically easier to save money and spend wisely; itís called the 50 30 20 rule, and here is how it works:

What is the 50 30 20 Rule?

The 50 30 20 rule describes a discipline in personal finance, wherein you split any incoming money into three portions: 50%, 30% and 20%. The first 50% of any income is set aside for essential expenses, such as rent, bills and food. The next 30% of any income is set aside for non-essential items, leisure and luxury, including nights out with friends and family or hobby-related expenditures. The remaining 20% of your income is set aside for savings.

50% on Essentials

This first 50% of your income should adequately cover any necessary expenditures in your household – but there are some essential costs which are not as easy to plan for as your regular monthly expenditure on rent, bills and food. For example, car maintenance is not a monthly responsibility, and services, checks and replacements can come out of the blue. A way to mitigate the impact of these costs on your essentials budget is to shop around for less expensive deals and services. If your carís tyres need replacing, shop around for cheap tyres that wonít harm your bank account. You may even be able to cut a deal on services with your local garage.

30% on Wants

30% may seem like a large percentage of your wage to be keeping aside for non-essential payments, but there are good reasons for it. Firstly, the average percentage of wage spent on rent differs wildly across the country, with tenants paying up to half of their salary towards rent in London, while those in the North spend half that monthly. The 30% on non-essentials is a useful cushion for those unfortunate enough to lose a significant portion of their income to essential costs. The other side of the equation is that many donít know exactly how much they spend on non-essentials each month, and 30% is a good average to cover all bases.

20% on Savings

The remaining percentage should be the only untouchable money in your wage packet. Savings are one of the most-neglected financial options in the UK, with 30% of UK adults saving no money at all. Savings are crucial Ė not just for emergency costs, but for the future of your household. This untouchable 20% is an excellent way to make certain youíre saving money, and 20% month on month adds up to a healthy safety net in case the worst does happen.