The 50/30/20 rule is a simple way of managing your money, after tax, by setting aside:
50% of your take home income for needs
30% of your take home income for wants
20% of your take home income for savings
Needs include your rent/mortgage, rates, electricity, gas, food, insurance etc. It also includes minimum debt repayment but it doesn’t include things subscriptions to online entertainment, spending on takeaway coffees and juices or eating out. Needs are the basics of life.
Wants include the good stuff. All the things you spend money on that are not essential. Eating out, entertainment, hobbies, fashion items as well as bigger ticket items like holidays, concert tickets and the latest smartphone or tablet. You can do without these things but life wouldn’t be quite as enjoyable if you did. It’s perhaps no surprise that this is the category that we all tend to overspend in.
Savings include repaying debts beyond just minimum repayments, saving money for emergencies and saving for your retirement. These are the sensible things that we all should be setting aside money for. Unfortunately, we tend not to save 20% of our take home income or to save at all. Remember, if your employer automatically deducts pension contributions from your salary; add these contributions back in to your savings amount.
Applying the 50/30/20 rule
So if your after tax income is £1,800 a month, according to the 50/30/20 rule, you should try to limit your needs to £900, you can spend £540 on your wants and you have £360 left over for saving or repaying debts.
Getting your spending in line with the 50/30/20 rule
It’s not unusual to discover that your spending doesn’t match the 50/30/20 rule perfectly. It might take a little while to bring it into line.
If your needs exceed 50%, you might have to do without a few wants for a bit and use some of that money for your needs until you can get your needs down to a more manageable level.
If your spending on your wants is way north of 30% then you need to take a good look at where your money is going and reign in your spending.
If your savings are much lower than 20% because of debt repayments then you might want to look at strategies for reducing your debts.
The information contained in this article has been prepared by Bank of Ireland for information purposes only. Bank of Ireland believes any information contained in the article to be accurate and correct at the time of publishing.