Household Budgeting: The 50/30/20 Rule

Community 2 min read

05 Jun 2020

A rule that was popularised in America in a book called All Your Worth: The Ultimate Lifetime Money Plan, the 50/30/20 rule is a broad idea that money should be divided three ways: into Wants, Needs and Savings - which, you may be thinking, is instinctive to how a lot of us budget anyway - but it became a popular due to its simplicity and the clear way it framed expenses. In essense: 50% of your budget goes to needs, 30% to wants, and 20% to savings.

Of course, if life was as easy as just splitting money into 50-30-20, then so many people might not be struggling and it may be an unattainable plan for those on very low incomes. Below we outline just how the idea works. You can also adjust the ratio to lower or higher to suit your needs; for example 70-20-10.

If you are having any kind of financial difficulty, you are always welcome to talk to your local credit union.

1. 50% Needs

So, the first part of the rule says 50% of your household budget on needs. What are needs? They are the things that you must, absolutely, necessarily pay for to ensure safety and survival: i.e. falling ill, becoming homeless or hungry. So; food bills, health insurance/doctor fees, mortgage, energy bills, car/transport costs, debt.

It doesn’t apply to things like Netflix subscriptions, Pyjamas, takeaway coffees – no matter how need-like those things seem! If you find you are spending more than half your salary on needs, than you may want to re-evaluate – perhaps switching electricity provider, changing car, using more public transport/cutting down on food bills etc.
 

2. 30% Wants

Within this current climate, 30% may seem a little high to spend on wants, so again, you may want to adjust the ratio to the ’70-20-10’ or more to suit you.

Wants, are, well – the things you don’t need to stay alive and well, but are your indulgences: Clothes, entertainment, eating out, holidays, phones, even gym membership – anything at all can be placed into the wants category. The hard thing is narrowing down your fundamental wants into 30% of your budget.

Of course, sometimes we do have to borrow to every now and again to purchase a car, or another type of ‘want’ – which is perfectly fine as long as we know our 10% savings can contribute toward the repayments.
 

3. 20% Savings

A part of your budget should always go into a rainy day fund, no matter how small. This counts for debt repayments – so as long as you meet your minimum payments, paying off any debt over and above this will save you money in the long run.

So there you have it – a very broad 50/30/20 structure for managing your budget. Once you’ve decided on ‘needs’ ‘wants’ and ‘savings’ you can then pop them into our handy budget planner here. You can also have a read of our blog on ways to manage a reduce household budget here, to help you manage these areas.