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What is 50/30/20 Budget Rule?

Establishing a spending budget asserts a degree of discipline in the way you distribute your income. Without a budget, your mind will let you spend freely, without realising the consequences of your actions. When you fall victim of your desires in a wishful moment and spend like there is no tomorrow, you are likely to burn away your spending power from the future, especially if you are using any form of debt to fulfil your desires. Keeping this in mind, it is crucial to create a budget to manage your spending habits.

However, not every individual has the discipline to follow a particular type of budget plan. If you have tried budgeting in the past and failed miserably, the problem does not lie within you, rather, it lies within the approach that you have chosen for yourself. Remember, life is a journey – so is the process of continually evolving and striving to stick to your budget, ultimately your long-term financial goals.

Ideally, the way you plan your budget should align with your character traits. If you are an individual who does not like to be micromanaged by your own budget, choosing a rather lax approach can work out in your favour.  A 50/30/20 budget rule is a relatively simpler approach to creating a financial plan.

This form of money management technique requires you to divide your after-tax income into three categories- needs, wants and debt/savings  Essentially, you are then required to dedicate 50% of your income to your needs/necessities, 30% to your wants and the remaining 20% to paying off debt or adding to your savings.

A 50/30/20 budget rule is a simple approach to creating a financial plan. If you feel that this approach could work for you, learn further about this strategy before you make your decision.

Differences between 50/30/20 Budget and a Traditional Budget

Typically, budgets are created by considering the actual spend of the previous year/month. A traditional budget builds itself on the basis of historical data. Whereas, a 50/30/20 budget is created using a percentage method. When creating this type of budget, you can refer to a traditional budget to gather an understanding about your areas of expenditure. However, in a 50/30/20 way of budgeting, you do not allocate a fixed amount to specific items on the list, rather you contribute a percentage share to an entire category identifying needs/necessities, wants and debt or savings.

For instance, in a traditional budget, you might set £1,200 aside to pay your mortgage, whereas, if you are using a 50/30/20 approach of money management, you would set aside twenty per cent of your after-tax income for the section of needs, which include mortgage, as well as other necessities.

Considering this, the 50/30/20 approach is less strict than a traditional budget. With the application of this method, you do not have to keep track of all your spending. Instead, you can track your budget on a consolidated or high-level figure basis and use it as per your individual needs.

As the method is quite simplistic, the 50/30/20 method of budgeting is easier to develop. It takes up less time. All you are required to do is classify your spending to fit into three categories. As a result, you will also save time using this approach.

On the other hand, using the traditional method of budgeting would require more of your time. This is because you would have to create a spreadsheet of all the areas in which you spend money. Along with this, you would also be required to allocate a particular amount to each area. A traditional budget can be extremely detail-oriented (you mention every area of spending, including frivolous expenditures), or it could be non-specific or generalisable.

What makes a 50/30/20 method of budget creation interesting is, it allows you the freedom to be flexible in the way you handle money. For instance, if you see a dress that you really (really) want on sale for £65, but a traditional budget only allows you to spend £50 per month on clothing and you be not wanting to buy it in order to stick to the budget. However, with a 50/30/20 approach, you can dedicate a portion from the 30% of your “wants” budget to purchasing the dress, while cutting cost on other desires. As a result, you wouldn’t have to make a sacrifice on an opportunity which is available for a limited time.

How does it work?

A 50/30/20 approach of budget creation works by empowering you to have full control of where you wish to spend a certain percentage of your money. This method is effective for people who do not like to feel restricted in their spending. If you feel suffocated by a traditional budget, the likelihood of you sticking to the plan would be extremely low. Hence, the 50/30/20 would be ideal for you as you can spend with some degree of freedom and with a few limitations.

Essentially, this approach of creating a budget is effective as it allows you to allocate money to three different areas of your spending. As it creates a barrier between the money required for your needs, wants and debt/savings, it compels you to meet all your payments on time, without spending excessively in one area.

In this method, you identify a list of your needs and differentiate them from your wants or desires. For instance, food, utilities and rent/mortgage are necessities – you have to pay them to survive. A ‘want’ could include things you enjoy but are not necessary for survival, such as a subscription to a streaming service or purchasing a guitar. Additionally, in this method, you also highlight your debt or allocate some money towards savings. You could save for an emergency fund, retirement plan or for future investment opportunities.

In the 50/30/20 rule of budgeting, you allocate 50% of your after-tax income to the necessities division. This means that if you earn £3,000 after-tax income, £1,500 should cover your basic requirements. Next, 30% your income would go to your wants or desires. Taking the previous number into consideration, you can spend up to £900 each month on the things that brings you joy in life. Additionally, you would dedicate £600 to either debt repayment or towards a savings plan.

Similar to all budgeting techniques, this method also allows you to re-evaluate your spending patterns. The 50/30/20 rule of budgeting makes you aware of how much money you spend on each area of life. For instance, if you are paying more than 50% of your monthly income towards necessities, this budgeting strategy would make you aware of that. As a result, you would implement some changes in your lifestyle to ensure that your money is being spent wisely. Since mortgage/rent and utilities are stable, consistent and predictable expenses every month, so this case you will re-assess your spending on groceries as this expense could vary month to month.

Additionally, if you are struggling with debt, this budgeting plan would require you to make all the necessary payments by allocating your monthly income to your debt repayments. With a budget planned, you cannot miss out on any payments as the money would be separated from your needs or wants, therefore, you wouldn’t be able to spend it – as long as your disciplined. Due to the 50/30/20 approach of budgeting, you would be able to meet your financial goals without any hindrance, caused by the lack of disciplined spending.

The Advantages of the 50/30/20 Budget Rule

The 50/30/20 method of budgeting offers a range of benefits, such as:

  • With this method of creating a budget, you are able to gauge an idea of how much you spend in a month. Like all budgets, it allows you to reflect on each area of your spending
  • As the 50/30/20 divides your spending into three sections, you are able to prevent yourself from spending excessively in one area. For example, you may have trouble managing money if you keep making impulsive purchases. These purchases would ultimately take out money from your savings. However, with a 50/30/20 approach, you would be restricted in spending a limited amount on the purchase you make on a whim
  • With a 50/30/20 strategy of creating a budget, you can (almost) guarantee to stay on course to repay your debt. This would allow you to dedicate a certain amount of your income to your debtor. As a result, you would never miss a payment
  • A 50/30/20 approach to a budget doesn’t take much of your time. The process of creating this budget is simple
  • If you want to save for an emergency, travel or retirement fund, this strategy would be ideal for you. It would compel you to dedicate 20% of your monthly income to your savings account. As a result, you wouldn’t impulsively spend that money in the present. Taking this into account, you can easily reach your financial goals faster
  • Additionally, the 50/30/20 method of budgeting can work out ideally for you, if you have an unsteady amount of income each month. All you would have to do is multiple your total income each month by 50%/30%/20% shares
  • As the 50/30/20 budget rule is quite relaxed, you are more likely to follow it. If you are starting out on creating budgets, the 50/30/20 approach is the perfect way to start managing your money. Once you master this strategy, you can move on to more complex budgeting methods
  • One of the biggest perks of using a 50/30/20 budget rule is that it offers flexibility. You do not have to stick to a specific schedule of spending, rather you are free to buy whatever you want, as long as it is within the spending range of that particular division or area. This flexibility allows you to feel comfortable with the approach

The Disadvantages of 50/30/20 Budget Rule

The 50/30/20 approach can help you manage your money better. However, the method does have some drawbacks, such as:

  • There are times that you do not always know how to distinguish between needs and wants. For instance, a subscription to a streaming service can be classified as both a need and a want, (in the midst of Covid-19 scenario). You want a streaming service as it brings you joy, but you can also postulate the argument that a streaming service is a need that could improve your mental well-being. With such a complex dilemma, deciding between the two becomes difficult
  • The 50/30/20 method would not work for you if you are looking for something that gives you more control of your life. The technique gives you a holistic, overall amount that you can spend. However, without the specific numbers, you may succumb to confusion and overspend in one area
  • The 50/30/20 budget rule can also be ineffective if your salary is significantly above the national average. For example, if you earn £10,000 a month, it doesn’t make sense to spend £5,000 a month on mortgage, rent, utilities or food. However, with such high income, you may not need to budget in the first place
  • This type of budgeting can also be ineffective in the case that the 50% of your monthly income fails to cover your basic needs. In this case, you would need to opt for a more complex budgeting strategy, such as zero-based budgeting
  • The 50/30/20 budget rule makes it difficult for you to track your spending. While it does add a little bit of discipline in your spending routine, it fails to bring awareness of how much you spend on a particular item. For example, you may shop for groceries within the 50% share, but you wouldn’t be able to understand or acknowledge if most of that fifty per cent is going towards your groceries. As a result, you wouldn’t make any changes to your grocery shopping

How to create a 50/30/20 Budget?

Unlike other budgeting strategies, applying the 50/30/20 budget rule to your income is relatively easy.  The entire process takes up less than 30 minutes of your time. To create a 50/30/20 budget, you need to follow four simple steps.

Step 1: Calculate your after-tax income

The first thing that you need to do is calculate your after-tax income for each month. You can look at the last month’s bank statement or payslip to see how much you received (net). On the other hand, if you are self-employed, you will have to take your business drawings each month. Please also consider any interest, dividends or rental income you receive. Some of these would be received quarterly, therefore, average out the income per month.

Step 2: Identify your needs

The next stage of forming a 50/30/20 budget is creating a list of your needs. Your needs include the basic requirements for survival. These may be items such as rent/mortgage, groceries, utility bills, car payments, and car insurance, etc. To truly differentiate between your needs and your wants, as yourself if you can live without that particular time. For instance, you can live without a car (if you cannot afford monthly payments), whereas, you cannot survive without electricity.

Your needs may vary from month to month, depending on your routine and income.

Once you have identified your needs, calculate 50% of your total after-tax income. For example, if your after-tax income is £3,000, your needs should be covered by £1,500 from your monthly income.

Step 3: Highlight your wants

The next stage is to list down your wants. In the 50/30/20 approach, you do not have to write down each and every one of your wants, rather, you can create categories such as entertainment, clothing, socialising, haircuts, going out to eat and buying the things that you love.

For these categories, you can dedicate 30% of your overall after-tax income budget. Taking the previous example into account, this amount would be £900.

Step 4: Set aside an amount for your debt /savings

The last area that you need to consider for your 50/30/20 budgeting is setting an amount aside for your debt or savings. If you do not have any debt, you can save money for an emergency fund, or start an early retirement plan for yourself. Additionally, you can also save money to plan a well-deserved vacation in the future.

For this subdivision, you would need to allocate 20% of your overall budget. Hence, if your total after-tax income is a steady rate of £3,000, you can add £600 every month to your savings plan.

Is it the right type of budget for you?

Choosing the 50/30/20 budgeting may be ideal for you if this plan works in accordance with your financial situation. If you are fortunate enough to have a high income, this plan may not be the most applicable for you. Additionally, if you need a strong structure to define your spending, the 50/30/20 budgeting approach is not recommended.

On the other hand, if you are looking to start managing your finances, using this approach can be a great way to start. As this method is easy to use, you can use it as an initiation budgeting process. Once you understand the idea of allocating money, you can move on to more complex methods.


The 50/30/20 budget rule is a simple approach that divides you total after-tax income into your needs, wants and debt or savings. This method allows you to remain flexible in your spending, while also endorsing that you do not overspend in one sub-division, such as your ‘wants’.  The 50/30/20 is ideal for those who do not need a strict budget to follow.

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