How to use the 50/20/30 budget rule

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The 50/20/30 rule was coined by Elizabeth Warren – an American senator and bankruptcy expert. The idea is to split your earning so that 50% goes on things you need, 30% on things you want, and 20% on repaying debts and saving for the future.

50/20/30 budgeting is useful if you want to:

  • Get on top of debt

  • Save steadily over the long-term

  • Cover essential costs more reliably

  • Avoid a very detailed budget

How to create a 50/20/30 budget

1. Work out your monthly income after tax

This is usually the net pay figure on your payslip. It may also include things like bonuses and tips. If you have an irregular income, consider working out a minimum, average or projected income.

2. Identify your ‘needs’

These are expenses you must cover to have an acceptable quality of life, such as:
Rent or mortgage payments

  • Council tax

  • Energy and water bills

  • Travel costs for getting to work

  • Basic food, clothing and personal care items (think bread, socks and soap!)

  • Internet and mobile phone contract

  • Minimum payments on credit accounts (you may run into financial and legal issues if you don’t pay these)

Of course, everyone has a slightly different idea of what an acceptable quality of life is. It’s best to start with the absolute basics and go from there.

Some expenses can be hard to place because they cover a ‘need’ but are also a luxury. To use an extreme example – you need to get to work, just not in a Porsche. You could split these costs between the ‘need’ and ‘want’ categories to balance them out.

Once you know what your ‘needs’ are, make sure you don’t spend over 50% of your monthly income on them. If you’re new to 50/20/30 budgeting, you may want to estimate upcoming expenses for the month. You can do this by looking at previous bills, bank statements or your Monzo Summary. If it looks like your ‘needs’ will go over 50%, consider how to reduce their cost (e.g. by finding cheaper travel).

3. List your ‘wants’

Spending almost a third of your earnings on things you want sounds sweet. But don’t buy those expensive shoes just yet! The category is designed to cover every purchase that isn’t completely essential – and you’ll find the costs add up quickly.

Here’s are some common examples of ‘wants’:

  • Movies, music and video games

  • Eating out and going out

  • Booze and fancy food

  • ‘Nice’ clothes and furniture

  • Makeup and perfumes

  • Phone and laptop upgrades

  • Holidays and weekend trips

Your ‘wants’ should take up no more than 30% of your monthly earnings. Again, it’s useful to estimate how much your ‘wants’ usually cost each month. Then you can find ways to reduce spending if necessary.

4. Make repayments and savings

  • You should put the remaining 20% of your monthly earning towards things like:

  • Building a rainy-day fund for emergencies

  • Saving up for a house deposit

  • Making pension contributions

  • Paying off credit cards, loans and other debt

Remember, this category only includes debt repayments over the minimum amount. For example, say you owe £1,000 on a credit card. Your agreement with the credit card provider means you have to pay at least £50 each month. But you’d prefer to pay off the debt faster, so that you’re charged less interest. You decide to pay off a total of £200 per month – £50 of this goes in the ‘needs’ category and the remaining £150 goes in the repayments/savings category.

Just make sure you won’t be stung by an early repayment fee for paying more than the minimum amount. You can check this in the T&Cs of your credit agreement.

Try a different version

Some people prefer an 80/20 budget, which lumps their needs and wants together. This may be suitable if you’re not struggling to cover basic expenses, but want to save up or repay debt more reliably.

People living in London and similarly expensive areas may find that 50% of their income isn’t enough to cover the basics. You might want to adjust the percentages to better suit your situation and financial goals, to 60/20/20, for example.

Check out zero-sum budgeting if you want a more detailed, short-term plan to get your spending under control. Or get back to basics with a household budget.

Monzo makes it easy to budget, set savings goals and track your spending 💪

This post was updated on the 10th of October, 2019