Mastering the 50/30/20 Budget Rule: A Guide for UK Budgeters

In the realm of personal finance, the 50/30/20 budgeting rule is frequently recommended as a straightforward and effective method to plan your spending. The rule was popularised by U.S. Senator Elizabeth Warren, a Harvard bankruptcy expert, in her book “All Your Worth,” co-authored with Amelia Warren Tyagi. While the concept originated in the United States, it’s broadly applicable, including for our UK audience. Here’s how you can apply this rule to manage your finances effectively.

Understanding the 50/30/20 Rule

The 50/30/20 budgeting framework is simple. It divides your after-tax income into three broad categories:

• 50% Needs: Essential bills and necessities only.
• 30% Wants: Leisure and non-essential expenditures.
• 20% Savings: Your savings or debt repayments.

To put the 50/30/20 rule into practice, you first need to figure out your after-tax income. If you’re employed, this will be your take-home pay. If you’re self-employed, subtract your taxes from your gross income to get the same.

Applying the 50/30/20 Rule in the UK

Calculating Your Expenses

To implement the 50/30/20 rule, begin by tracking your expenses. This will enable you to categorise them into ‘needs’, ‘wants’, and ‘savings’. Use tools like Money Advice Service’s Budget Planner to get started.

Managing Your Needs (50%)
While defining ‘needs’, consider expenses without which you can’t operate day-to-day; these include housing costs (rent or mortgage), utilities, groceries, health insurance, car payments, and other essentials. In the UK, consider things like council tax and TV licenses as part of your needs.

Allocating for Wants (30%)
The ‘wants’ category includes expenses that you desire but don’t necessarily need, such as dining out, subscriptions (like Netflix), gym memberships, holidays, etc. It’s crucial to differentiate between wants and needs to avoid overspending in this category.

Saving (20%)
Saving is fundamental for financial resilience. Aim to direct at least 20% of your income into a savings account or use it to pay off debts. Consider setting up an ISA or a regular saver account with providers like HSBC or the Barclays Savings for efficient saving. Remember, if you have significant debt, prioritise making extra payments over additional saving.

Tips for Success with the 50/30/20 Rule

Adjustment is Key
If you find that the 50/30/20 rule isn’t an exact fit due to higher essential expenses or debt, adjust the percentages to better suit your financial situation. It could look more like 60/20/20 if you live in an area with high living costs.

Use Budgeting Tools
Consider using tools like You Need a Budget (YNAB) and apps like Mint to help manage your money flow and stick to your budget effectively.

Review Regularly
Regularly review your budget and adjust as necessary. It’s okay to redistribute percentages as your financial situation changes.