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The 50/30/20 rule: what it is and how to use it

Budgeting is one of life's most common and prominent struggles. There are so many ways to do it and so many people proclaiming that their way is the way. The truth is, that no one way is the ultimate way - each person has their own unique set of circumstances and requirements which makes following someone else's methods rather difficult.

However, one of our favourite and most flexible budgeting techniques is the 50/30/20 rule. The 50/30/20 rule was popularised by democratic politician Elizabeth Warren in her book 'All Your Worth: The Ultimate Lifetime Money Plan' and has since become a global phenomenon.

The idea is to split your income into three spending categories.

50-30-20 budget rule

50% for your needs  

50% is for all your basic needs. Your needs are those basic bills that must be paid, such as rent/mortgage, groceries, insurance, minimum debt payment and utility bills. This means that other items such as subscriptions to TV, Netflix and phone etc aren’t included in this section. The point here is that half of your total take-home salary should cover any needs and prior obligations. If you are finding that these needs are taking up over 50% of your salary, then you might want to look at cutting down on what you are spending your money on. For example, consider making savings on your groceries by buying store-own brands or by visiting more value friendly shops.

Another common expense people face is their transport to work. One way of reducing this cost is carpooling which splits the petrol and parking costs by however many people you share with.  

30% for your wants 

Your wants are characterised by those costs which aren't inherently essential to your life, including but not limited to; holidays, TV packages, music streaming, brand new clothes each week, having the latest phone and even gym memberships. Whatever lands in your 'wants' pile is exactly that - a want. It's optional and should be the first thing to cut back if you are struggling or looking to save more.

Many people struggle with wants and are surprised at how much they spend on unnecessary things like having the fastest broadband or ultra-modern car but if you are spending over 30% of your salary on wants you may want to cut down by choosing a less expensive restaurant or doing a staycation rather than flying abroad. There are endless ways to cut down if you need to. However, the aim of this budgeting rule isn’t to rule out any form of fun or enjoyment, it’s simply to ensure that the right amount of money is being spent in the right areas.

20% for your future 

Arguably the most important rule is that 20% of your monthly salary should be put into savings or investments. Ideally, you should reach a point where you have a 3-4-month emergency fund in case you find yourself unemployed and once that goal is reached it's ideal to think about the long-term plan of retirement.

With the pension age constantly increasing, people are becoming more and more reliant on their private pension contributions. Moreover, the 20% savings can also go towards debt payment as the 'needs' focused on the bare minimum repayments. Anything leftover should be used to reduce any debt as fast as possible helping towards a debt-free life. 

If you're ready to begin saving, Paragon can help. Discover our extensive range of savings accounts from Cash ISAFixed-rateLISAEasy access and Notice accounts.

Paragon Bank PLC is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England number 05390593. Registered office 51 Homer Road, Solihull, West Midlands B91 3QJ. Paragon Bank PLC is registered on the Financial Services Register under the firm reference number 604551