The 50/30/20 rule: the ‘easy’ budgeting hack explained

Living within your means while saving for the future may seem trickier than ever as costs rise, but a popular budgeting strategy could help.

The 50/30/20 rule was laid out by then law professor Elizabeth Warren in her 2005 book All Your Worth: The Ultimate Lifetime Money Plan. The now US senator’s idea is to split your post-tax income into three categories – needs, wants and financial goals – to provide “a rough guideline to help you build a financially sound budget”, said The Balance.

How does the 50/30/20 rule work?

According to Warren’s theory, about half of your income should be spent on needs, such as rent, mortgage and household bills; 30% on wants, such as nights out, clothes and hobbies; and 20% on financial goals, such as savings, investing or paying off debt.

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The first step is to look at your bank statements to see how much money is coming in each month. Work out the total of all your sources of income, which may include a salary, state benefits or investments. If your monthly income tends to vary, work out the average for at least the previous three months.

The income figure is then split into the three spending categories. According to The Money Edit, if you earn £35,000 a year, your monthly income would be about £2,109 after tax and an 8% pension contribution. This amount would be split as £1,054.50 on needs, £632.70 on wants and £421.80 on financial goals.

Don’t get “too philosophical” about your needs-based spending, said Refinery29, just include the “things you can’t live without”. Failing to pay your rent could cause “troubles”, so “that would count as a need”. And you “also need to eat, it’s likely you need transportation to get to work, and you probably can't live without heat and electricity”, the site added.

Your so-called wants may be harder to list, but setting a limit “can help to scratch the itch of wanting to buy and do things, while simultaneously preventing you from going overboard”, said Investing Reviews’s financial editor Antonia Medlicott.

Financial goals will also vary, but the remaining 20% of your income could go towards starting and growing an emergency fund, saving for retirement or paying off debts, starting with the most expensive forms of credit.

Ultimately, you can set your own rules “in some ways”, said The Money Edit. “Should the money for things like holidays come from your ‘wants’ category or ‘financial goals’ category? It’s up to you.”.

Does the 50/30/20 rule work?

The method is just a guide and the percentages can be tweaked, said money website Up The Gains. A lot of costs can be saved through cutting down the ‘wants’ in the 30% section, and “whatever’s saved here can then be added to the ‘needs’ in the 50% section” – so you may end up with a 55/25/20 split, or a 60/20/20, for example.

Depending on your income and where you live, you may have to boost your ‘needs’ allocation. Some people may spend a considerable proportion of their income on housing, “making it almost impossible for them to keep their needs under 50% of after-tax pay”, said Credit Karma

The 50/30/20 rule “won’t work for everyone”, agreed Forbes. Saving 20% each month “may be too high for some and too low for others”.

Whatever your income, “make sure you are not overpaying for items that you need to live comfortably”, said financial coach Emma Maslin, founder of personal finance education website The Money Whisperer. This may mean switching your mortgage or broadband supplier, or “changing where you shop, meal planning to avoid wastage and buying in bulk to make sure you’re getting the most for your money”.

“It can be time consuming,” Maslin wrote on MoneyBee, “but it’s time well spent.”

Marc Shoffman is an award-winning freelance journalist, specialising in business, property and personal finance. He has a master’s degree in financial journalism from City University and has previously worked for the FT’s Financial Adviser, the financial podcast In For a Penny and MoneyWeek. This article is based on information first published on The Week's sister site, The Money Edit