50-30-20 Rule in Budgeting
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The 50/30/20 budgeting rule is an effective method for managing your finances. This straightforward yet powerful rule can help you grow your income and manage your money more efficiently.
Developing the habit of budgeting each month offers numerous benefits, such as better money management and increased savings. These funds can then be used for emergencies, rainy days, or specific goals like holidays, home improvements, or your children’s education.
We offer a variety of tips and tools to help you start saving. Our budget calculator helps you determine your monthly income and expenses, revealing how much you can save. This tool also highlights potential cost-saving areas, motivating you to spend less and save more.
Planning your household budget is another simple way to start saving. By examining your monthly expenditures, you can identify areas to reduce costs. Our annual budget spreadsheet helps manage income and expenses more effectively, enabling better financial planning throughout the year.
Whatever you choose to save for, our budgeting blog provides valuable information to get you started on your savings journey.
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What is the 50/30/20 Rule in Budgeting? The 50/30/20 rule is a simple and practical budgeting method that divides your net income into three categories:
- 50% for necessities such as household expenses, mortgage, rent, food, utilities, and health insurance.
- 30% for non-essentials that improve your quality of life, like dining out, entertainment, and gym memberships.
- 20% for savings, an emergency fund, and debt repayments, including credit cards, student loans, pension contributions, and an emergency fund.
This rule is a great starting point for those new to budgeting as it’s simple, easy to remember, and encourages saving. However, it’s just a guideline and may need adjustment based on individual needs and goals.
50% – Spending on Your Needs To start with the 50/30/20 budgeting system, first look at your overall income and then add up all your essential outgoings. These include unavoidable expenses like mortgage or rent, food, and utility bills.
Ensure these essential expenses fit within the 50% allocation of your income. If they exceed 50%, identify areas where you can cut back. If your essential spending is less than 50%, you can allocate the surplus to your savings or discretionary spending.
For practical tips on estimating your spending, read our blog on how to track your expenses.
30% – Spending on Your Wants After accounting for your essential expenses, examine your non-essential spending. These discretionary expenses should ideally not exceed 30% of your overall income.
Adjustments to discretionary expenses might be easier. For example, cooking at home instead of dining out, reviewing subscriptions to streaming services, or considering exercising at home instead of maintaining an expensive gym membership can reduce costs.
Look for savings in phone and internet services, consider public transport instead of owning a car, and shop smartly by looking for sales, using coupons, and buying second-hand when possible.
20% – Spending on Your Financial Goals After calculating 50% for needs and 30% for wants, allocate the remaining 20% for savings and an emergency fund. This exercise will clearly show your incomings and outgoings, ensuring 20% of your income is saved.
Having a savings objective in mind will motivate you to stay on track. Your financial goals could include buying a house, planning a dream holiday, funding your children’s education, or saving for retirement. Prioritise your list of goals to focus on the most important ones.
This article provides examples of short, medium, and long-term saving goals and a step-by-step guide to help you set realistic financial objectives. A useful resource is our guide to sinking funds, which can help set aside money for large expenses.
For beginners, we offer a step-by-step guide to investing to help you understand investment options and how to get started.
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How to Distribute Money Using the 50/30/20 Rule Here’s how to apply the 50/30/20 rule:
- Work out your net income: Calculate your income after tax and deductions. For employees, this is your monthly paycheck after tax and deductions for things like a pension and health insurance. For freelancers or those with multiple income sources, this is your income after setting aside money for taxes and business expenses.
- Split your money three ways: Divide your expenses into needs, wants, and savings. Needs are essential expenses, wants are discretionary, and savings are for emergency funds and long-term goals.
- Review and adjust your spending: Once you have a clear view of your spending, adjust your budget to fit the 50/30/20 rule. Cutting back on non-essential items can help you meet your 20% savings goal.
Our budget calculator is a handy tool to help you divide your income into needs, wants, and savings, showing you how to budget effectively based on the 50/30/20 rule.
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Example of the 50/30/20 Rule Lisa’s monthly income after tax is €3,000. Following the 50/30/20 rule, her expenses might look like this:
Category
Expense
Amount
50% – Needs
Mortgage
€850
Food
€400
Energy bills
€100
Phone and internet
€75
Car and health insurance
€75
Total
€1,500
30% – Wants
Shopping
€300
Entertainment
€250
Gym membership
€150
Eating out
€150
TV and streaming services
€50
Total
€900
20% – Savings
Savings
€400
Emergency fund
€200
Total
€600
Saving Options Now that you understand how much you can save each month using the 50/30/20 rule, it’s time to explore your saving options.